Growth at any cost

Growth at any cost

17 October 2019 from Anna Svahn

Jeremy Powell's main focus is to extend the business cycle we have been in for the past decade. In an interview with Real Vision, Julian Brigden from MI2 talks about his view on macroeconomic developments right now and is similar to the current situation with 2015 and 2016 when we saw increased risk in Asia that caused central banks to push up monetary stimulus to continue driving growth.

Since the financial crisis, we have seen extreme monetary stimulus from the world's central banks in an attempt not to end up on the slope again. Today, Powell's main focus is to extend the cycle to keep up economic growth at all costs, but to continue kicking the can in front of us will require even more of the Fed, says Julian Brigden.

US economic growth is currently dependent on keeping share prices up, interest rates low and most importantly - weaker USD.

The now more than 10-year boom has previously been challenged by macroeconomic unrest, such as in 2015-2016, when Asia demonstrated weaker growth, which caused central banks around the world to panic. They met in Davos, and soon fiscal stimuli were switched over so as not to slow down economic growth at all costs in the US as well. Now it's been another three years and the toolbox is starting to echo empty, Powell himself has said to then switch again to lower interest rates and smuggle QE programs (although he was clear that what we see now is in fact something completely different).

However, it is not risk-free to push the economy with strong stimulus without giving it a chance to return to normal levels. Now we see more and more signs of problems bubbling under the surface of the inflated asset bubble that we are in. Companies such as Netflix and WeWork are two examples of this, where the valuations in both cases are abnormally high. House prices in the United States that have recovered after the financial crisis, Julian Brigden says , are another good example of highly valued assets.

When the Fed tried to normalize through monetary policy tightening in 2018, it quickly had major consequences for the economy. The big problem here is that financial markets have become leading the economy. In many cases, a CEO of a listed company's job is about keeping the share price rising. This means that if the Fed tightens monetary policy through QT and it has consequences for the companies' share prices, it could lead to the CEO over-looking costs, dismissing employees and not in the same way daring to invest in their own operations because he or she must ensure so that next quarter's results are better than expected to defend its valuation.

This leads to the economy being extremely sensitive to downside changes. Ben Bernanke has said that it is enough for unemployment to rise by 0.3 percent to prevent the trend from reversing. When so many people lose their jobs, he means that it creates a great uncertainty that affects consumption and thus ultimately economic growth. And even though the latest job numbers from the US came in at perfectly okay levels, we can conclude that we seem to loose momentum.

What is the alternative for the Fed and investors in the future? Real monetary policy stimulus in the form of QE will be required. This could  keep valuations at today's levels and even higher, which would mean that there is still some upside in the stock market, and above all, larger index overlapping companies.

 @Anna Svahn

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11/11/2019 21:28:02

 

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