As we enter June it is easy to see a world returning to normal. Shops are re-opening, schools are allowing back some children and we are once again allowed to sit down in a park without being caught by the long-arm of the law.
Most financial markets have re-gained around half their losses and look set to make further advances as the real economy returns to life.
It is as if we are hosing down the last embers from a house fire. Next is the difficult task of picking through the wreckage and finding out what we lost in the fire. We can for a moment celebrate the end of the flames, but we will quickly have to address the consequences.
We believe those consequences will be profound and will ultimately affect the performance of stockmarkets for years to come.
Governments around the advanced world are facing up to the enormous debt produced by this crisis. It has lifted the debt to GDP (the amount we owe versus the size of our economy) for the advanced world to a level not seen since the Napoleonic Wars. Higher even than in World War II or the great depression.
How governments choose to tackle this debt will be the single defining factor of the coming decade.
We believe that the approach will be to force interest rates ever lower for longer whilst also pumping in money to boost growth.
The ‘austerity’ economics seen in the wake of the Great Financial Crisis, designed to restore fiscal discipline, is no longer an option. The debt is too large and it would be politically impossible to enact the sorts of taxes or spending cuts needed to reduce it from these levels. We can expect centre right governments such as our own in the UK to not admit this, and even to put in place some cosmetic measures to cut spending, but it is their only option.
The heavy lifting of debt reduction must be done by boosting growth, cutting interest rates and stirring up the inflation that when present reduces the relative size of our debt. This may not reduce the amount of debt, but it could reduce the amount of debt relative to the size of economies. At this stage this is the best governments can hope for.
These measures must be put in place at a perilous time for society. In the United States rioters have taken over major cities protesting the killing of an unarmed black man in Minneapolis.
This group of disenfranchised minorities is met across the metaphorical street by a huge cohort of angry largely-white working class voters who swept Donald Trump to his first term in power.
What unites both factions in the United States is the fact that a huge share of the US economy has gone to ‘capital’ as opposed to workers over the last seventy years. It has been steadily declining since the 1970s and in each recession it has fallen further.
Workers can see now that ‘the house always wins’ and are prepared to protest this at the ballot box. Each crisis brings a fresh wave of monetary stimulus in the form of low interest rates and quantitative easing which swell the pockets of those with financial assets rather than those without.
The conclusion has been reached by governments around the world that this cannot continue if moderate centrist governments are to remain in power – or in the United States re-gain power.
In the UK Boris Johnson is determined to hang-on to his embattled adviser Dominic Cummings – the man who is his constant connection to this central piece of analysis and therefore the person who has propelled him to power. This means that significant government spending must be initiated in the years ahead alongside the ultra-low interest rates needed to reduce the size of our debt.
We believe this will support the investment case for those companies with long-term predictable cashflows. These businesses thrive when rates are low as investors see the merits of their predictable income at a time when little can be earned in the bank. It also suggests that those companies that have borrowed money in the form of bonds – even risky ones – will be propped up by the central banks.
It remains to be seen whether this debt can be reduced without widespread unease from the advanced world’s under-paid working and lower middle classes. However, this is now the central aim of governments for the next decade.
Ironically we believe it will create a supportive environment in which to invest.
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