CFS Board Member and former FDIC Chair Sheila Bair and I note how:
Conservatives accuse progressives of wanting to destroy capitalism. Yet a greater threat than Bernie Sanders is the prospect of serial market bailouts by monetary authorities.
The creation of the corporate facilities last March marked the first time in history that the Fed would buy corporate debt. The plan went far beyond previous quantitative easing.
– There is not much evidence that all of that cash went toward creating and preserving jobs in the U.S. – Corporate facilities merely intensified the damage that monetary interventions had already dealt to U.S. capital allocation.
Capitalism doesn’t work unless capital costs something and markets don’t work unless they are allowed to rise and fall. Corporate facilities should not become part of the Fed’s standard tool kit. Let them die.
Last week, we hosted a roundtable discussion with CFS Advisory Board Member Charles Goodhart and his co-author Manoj Pradhan.
The Great Demographic Reversal is superb. It addresses head-on demographic forces that will only gain in importance over time. The book proposes that the underlying forces of demography and globalization will shortly reverse three multi-decade global trends – it will raise inflation and interest rates, but lead to a pullback in inequality. Charles and Manoj broadened the country-by-country demographic analysis by connecting many global threads and interactions among nations.
Jason Zweig’s “The Bull Market Isn’t As Big as You Think” in The Wall Street Journal nicely illustrates how the stock market may not be as disconnected from economic reality as many suspect. However, the piece misses the monetary elephant in the room.
Not surprisingly, the relative outperformance of value versus growth strategies coincided with periods when the Fed curtailed its injections of monetary liquidity: 1) the end of QE1, 2) end of QE2, 3) end of QE3, and 3) the period of quantitative tapering.
Although the monetary policy response to the Coronavirus was needed, unintended distortions should be acknowledged and incorporated into future actions.
The implication for value investors is clear. Monetary largess is wreaking havoc with the investment strategy. For the public and officials, the propagation of valuation distortions starve a wide spectrum of deserving companies and industries access to capital. This will surely minimize private sector driven growth going forward.
Today my letter in the FT responds to Martin Wolf’s “Coronavirus crisis lays bare the risks of financial leverage, again.” Martin clearly highlights segments in capital markets creating fragilities before the recent shock.
The role of central bank policy distorting incentives in 2019 was absent. Skewed investing incentives began on December 18, 2018 – when the FOMC statement misread the global economy and markets and balance sheet expansion resumed.
In the middle of financial crises, one often hears “Now What?”
At the Boston Economic Club, I discussed the evolution of three vectors (policy, markets, and the Coronavirus). These vectors offer officials a blueprint to stabilize markets and asset managers a roadmap for investment decisions. To be sure, the Coronavirus is only part of the reason behind the fierce market response.
Six big “Now Whats” or action items are discussed.
We thank Otmar Issing for sending a recent “Memorandum on the ECB’s Monetary Policy” in response to CFS distributions. To be sure, the broad content of the message was covered in the financial press. However, meaningful nuances and details are only apparent with a full read. Hence, it may be of interest to CFS friends.
Hervé Hannoun, Former First Deputy Governor, Banque de France, Paris
Otmar Issing, Former Member of the ECB-Executive Board, Würzburg
Klaus Liebscher, Former Governor Oesterreichische Nationalbank, Vienna
Helmut Schlesinger, Former President Deutsche Bundesbank, Oberursel
Jürgen Stark, Former Member of the ECB-Executive Board, Frankfurt
Nout Wellink, Former Governor De Nederlandsche Bank, Amsterdam
Judgement shared by:
Jacques de Larosière, Former Governor Banque de France, Paris
Christian Noyer, Former Governor Banque deFrance, Paris
CFS is delighted to share Robert Hormats and Yves-Andre Istel’s personal views on “Inequality Perils from Lower Rates.” They contend that:
Low interest rate policies have become increasingly ineffective in fostering equitable growth.
Negative effects of ultra‐low rates have been underestimated and are greater than generally thought, especially in increasing inequality.
Therefore, a new mix of monetary/fiscal policies with a long-term structural focus is called for.
Yves and Bob have been thoughtful and engaged with CFS. Robert Hormats is the former Undersecretary of State for Economic Growth, Energy, and the Environment. Yves‐Andre Istel is a Senior Advisor to Rothschild & Co.