Did the Clinton Trump debate raise questions for NZ investors?
style=”text-align: justify;”>Tuesday’s presidential – Clinton Trump debate – featured a fresh line of attack from Donald Trump. This US presidential election cycle has certainly been extremely rare in its polarising nature, and its breaches with established party economic policy orthodoxy. This was clear from the start in Trump’s trade-unfriendly policies. Although politicians in the US have periodically skirmished with central bankers, Mr Trump’s comments were the most dramatic, questioning the competence and political independence of the Federal Reserve. He also had a stinging critique of the US economy and markets as being a “big, fat, ugly bubble”. It goes without saying that such comments are designed to fit into his narrative of a country in decline, that only he can turn around.
Ironically though, for all Secretary Clinton’s criticism of Trump’s tax plans as re-hashed “trickle down” theory, it is arguably the Federal Reserve that has been the most enthusiastic proponent of “trickle down” policy, via their implicit targeting of asset prices. Quantitative easing and record low interest rates do not in and of themselves create sustainable economic activity – they can only bring it forward via manipulation of the time value of money. By lowering the discount rate for future cash flows, they push up prices of existing assets. Via the so-called “wealth effect”, this in itself is also supposed to stimulate, or at the very least sustain economic activity. The fact that the last 12 months have seen the Fed repeatedly pull back from interest rate increases in response to equity market declines, rather than meaningful negative changes in economic fundamentals, is further evidence of this policy being followed.
This dynamic of course is not limited to the US – in fact other central banks have been far more overt. As part of its unconventional monetary policy, the ECB buys corporate debt – effectively a direct financial subsidy to large corporates, and the Bank of Japan buys significant amounts of equities for its balance sheet – both enriching the private shareholders who sell to them, and increasing the mark-to-market wealth of Japanese equity holders. Arguably these policies represent a perversion or failure of capitalism that has not been fully acknowledged or reconciled.
The questioning of these policies in mainstream consciousness is significant. One could argue that the last few years has seen one of the biggest wealth transfers in history – from future holders of assets, to current holders of assets. And it has been one conducted by unelected and unaccountable bodies. When you consider who the typical owners of equities and investment assets are, it is not difficult to see why populist policies are gaining traction across the Western world.
Meanwhile, any disorderly “lifting of the lid” on the shortcomings of central bank policies is likely to help rather than hinder NZAM portfolios. The implication is that NZAM investors have little to fear from a Trump presidency.
30 September, 2016 – James Caughey is NZAM’s Senior Research Analyst.
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