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Update: Pro-Growth Policies

By beled | August 11, 2017

Extract from the June 2017 quarterly report:

Since the global financial crisis of 2008, both global growth and inflation have responded very anaemically to unprecedented levels of monetary stimulus, these days known as quantitative easing or “QE”. The reasons for this are many and complex, and do not appear to be sufficiently understood by both politicians, their economic advisors and indeed ourselves. In US Fed chairperson Yellen’s recent testimony to congress she said the Fed was puzzled by the slowdown in global inflation and that it seemed sluggish price rises had structural causes. Mario Draghi of the ECB and German chancellor Merkel have recently made similar comments about the lack of effectiveness of monetary policy. Japan has already supplemented easy monetary policy with stimulatory fiscal policy.

It is possible that the following factors are at least partly responsible for ongoing deflationary conditions:

• In the US inflation expectations have become “anchored” at about 1% after 36 years of disinflation. This can also be deduced from both nominal (US government 30 year TB’s) (chart 1) and real long-term interest rates (30 year Treasury Inflation Proof Bonds (TIPS)) (chart 2) which both reveal long-term inflationary expectations to be very low:
• QE not sufficiently offsetting the contractionary effects of fiscal austerity and de-leveraging in major developed economies;
• Absence of the crucial economic growth catalyst of confidence.

While we do not claim to be able to predict either the timing or the extent of more favourable fiscal policies in both the US and Europe, we sense that fiscal austerity is becoming increasingly unpopular and that pro-growth policies are in the ascendancy. On the balance of probabilities this positive economic outlook should prevail but as always must be viewed in conjunction with equity valuations which in some cases have already discounted better times. Caution therefore remains appropriate.

Chart 1: US inflation and 30yr TB’s (%)










Chart 2: US inflation and 30yr TIPS (%)

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