THINGS HAVE CHANGED...
2018-09-20 3pm EDT | #monetary policy
Today’s post is sure to anger a bunch of you. My libertarian friends (you know who you are) will probably be the most outraged, but I suspect many will misinterpret my observations about society’s most likely path as my belief regarding the proper course. So let me try to be clear. I have no interest in asserting I know what should be done, but rather I am focused on what will be done. If you want to debate the theoretical, then there are a myriad of websites for you to choose from. Whether you are conservative or liberal, hard-money or gasp Keynesian, there is a place for you to feel safe and share your views about society’s optimal direction. But let me tell you right now - this isn’t it.
So put aside your political views and try to deal with only probabilities as opposed to your desires regarding economic policy.
Although the Republicans are supposedly the party of fiscal conservatism, we all know that sort of talk is only for when they are not in power.
Again - please do not email me with your political rant. I have no dog in this hunt. When it comes to the markets, I am politically agnostic and the only religion I worship is that of the Market Gods.
There should be little surprise that under Republican stewardship, the greatest fiscal stimulus in the past decade has been instituted. Not saying if it is good or bad because my opinion is completely irrelevant.
But I would like you to step back and think about the recent bout of U.S. economic outperformance. It’s probably fair to say that relative to the rest of the developed world, American fiscal policy has been easier while monetary policy tighter. This is the complete opposite of the past decade’s recipe of tighter fiscal policy (as austerity and other budget balancing policies were enacted in the wake of the 2008 credit crisis) and easier monetary policy. I say easier monetary policy but that’s really underselling the reality of the situation. Un-friggin-precedented easy monetary policy is probably more appropriate. Stupid bat-shit-crazy stuff like negative rates and shockingly large expansions of central bank balance sheets has become so normal that market participants have become numb to them monetizing billions of dollars against previously unheard of assets like equities. Over the past decade, governments throughout the world have tamped down their fiscal spending while central banks have desperately tried to offset the slowdown with irresponsible monetary stimulus.
Yet that’s changed over the past couple of years with Americans taking the exact opposite tack. And what has been the result? Economic outperformance.
The changing environment
Now, don’t worry if it is sustainable. Don’t worry if it is smart. Don’t worry if it is right.
All you need to ask yourself is what are consequences of this development?
Do you think it likely Europe or China will look at America’s outcome and say, “you know what? We should really cut spending and push even more monetary stimulus into the system?”
Not a chance.
The entire world will look at America’s success and copy them.
What will that mean? More spending. Larger deficits. Most likely, higher interest rates. And strangely enough, probably a much stronger global economy.
Think I am wrong? Then you aren’t paying attention. It’s easy to see the change in attitude. In the aftermath of the Great Financial Crisis even the most left-leaning politician had to keep their spendthrift opinions in check. Contrast that to today’s shift in sentiment. Where are the Tea Party faithful demanding an end to Trump’s deficits? Crickets… And how about U.K. Labour party’s embracing of Richard Koo’s balance sheet recession concept? Here is a fascinating video ad from Jeremy Corbyn and his party.
Austerity doesn’t work. pic.twitter.com/LvKSMvHetI— Jeremy Corbyn (@jeremycorbyn) August 17, 2018
Do I need to say it one more time? Probably. Don’t email me spouting all sorts of terrible things about Corbyn. I don’t care.
I am only concerned about the fact that there has been a sea change in the public’s attitude toward spending and debt.
Maybe Corbyn will never be elected. Not disputing that one bit. But it’s not only U.K. Labour party bold enough to make a stand against austerity:
You would be foolish to ignore the dramatic change in the world’s attitude towards economic policy. “Tight fiscal and easy monetary policy” is being replaced with “easy fiscal and (somewhat) tighter monetary policy”. And ironically enough, the Republican Party under Trump’s “leadership” is at the forefront of this change.
Don’t worry about whether it’s right or not. Don’t let your political views get in the way of your portfolio construction. Just worry about whether this trend will get more or less intense from here. My bet is that this is just the start…
Thanks for reading,
East West Investment Management
Global Select Opportunities Fund