My Comments: The US Federal Reserve took a very different approach to helping the economy recover from the financial crisis that began in the fall of 2008. Pushed by Mr. Bernancke, the Fed provided what came to be called QE, which stands for quantitative easing. It kept interest rates low and effectively flooded the economy with cash with the idea it would result in faster recover. This is not to say it was hugely successful.
The European approach was almost the opposite. They avoided the Keynesian approach and instead moved to promote austerity, deprive the economies of liquidity, and force accomodation by governments and business enterprises to take a hit and adjust or disappear. It now appears that austerity was the wrong path. This should have been obvious from the experience of Japan some two decades ago when they took this approach and ended up with what is known as the lost decade. There was virtually no growth for ten years, and while savings accounts grew dramatically, no one spent anything which stymied everything.
Some weeks ago I acknowledged that my personal spending habits, following our crash in 2008, are now part of our problem. If I make money and don’t spend it, my sense of security is increased, as I have money in the bank. But for every dollar that I don’t spend above what is absolutely necessary, about $7 is removed from the local economy. That’s because my $1 represents revenue to somebody else, which in turn means that person can spend it on a new car, or whatever. It’s the multiplyer effect and contributes to the velocity of money.
Now, Scott Minerd says the European central banks are likely to turn the corner and become more accomodating. That means good things for those of you who have money invested in the global economy and growth will be the result.
September 03, 2014 / Commentary by Scott Minerd, Chairman of Investments and Global Chief Investment Officer, Guggenheim Funds
Aggressive central bank accommodation from Europe to Japan and a dovish Federal Reserve bode well for equities and bond prices.
The Federal Reserve’s annual getaway in Jackson Hole is not usually considered a gathering of rock stars, but that’s exactly how the late August event unfolded. The hawks loosened up the crowd with their dark, foreboding lyrics. After that, the doves sweetened the mood, singing a far more melodic and happy tune. Then the event’s two biggest stars—Fed Chair Janet Yellen and European Central Bank President Mario Draghi—hit the stage amid the twin pyrotechnics of easy money and a vision of the future where every worker has a job, and the crowd went wild.
The biggest news was Dr. Draghi’s comments that the ECB may soon have no option but to join the United States and Japan in undertaking more aggressive accommodation through a quantitative easing program, taking up the slack as the Fed ends its asset purchases. “On the demand side, monetary policy can and should play a central role, which currently means an accommodative monetary policy for an extended period of time,” he said, before adding the kicker that the ECB will “stand ready to adjust our policy stance further.”
Reinforcing Dr. Draghi’s outlook was Monday’s dismal data out of Europe’s largest economy. According to Germany’s Federal Statistical Office, German GDP contracted 0.2 percent in the second quarter. As goes Germany, so goes the euro zone, where inflation has fallen to 0.3 percent (its lowest level in five years) and manufacturing is struggling.
It’s not just Europe that could add stimulus. Bank of Japan Governor Haruhiko Kuroda faces similar pressures as Japan’s economy has failed to rebound after a sales tax hike prompted the sharpest economic contraction since the start of 2011.
Back at home, we expect the Fed’s band will keep playing its merry tune for now. The voting members of the Federal Open Market Committee in 2015 will be even more dovish than the current committee. If there is a risk, it is that the Fed will keep monetary policy at a high level of accommodation for longer than previously anticipated.
Financial markets heard the sweet song of easy money from Jackson Hole loud and clear, sending equities up strongly while driving U.S. Treasuries’ prices higher and yields lower. The recent high of the New York Stock Exchange Advance-Decline Line supports this optimistic hypothesis, suggesting that stock prices will continue to reach new highs.
The world’s central banks will be doing whatever is necessary to keep their economies from falling into depression or any other economic malaise. So not to worry: From what we heard in Jackson Hole, the world is a beautiful place and the easy-money band won’t stop rocking.