A Few Things...
November 6, 2019
Coming to you from a Family Office conference in Monaco.
A. Modern Monetary Theory aka Helicopter money is coming…..
I had a few friends who attended the IMF meetings in D.C. I’m told that 40 years after the 1979 election of Margaret Thatcher confirmed the ascendancy of various forms of monetarism, the intellectual pendulum is swinging back to the Keynesian idea that fiscal policy – decisions about government spending, taxation, and borrowing – offers the most effective instruments for managing demand and stabilizing economic cycles.
Central bankers have been the first to recognize that monetary policy has reached its limits, while many politicians and academic economists remain in denial about the paradigm shift now taking place.
But the much more radical challenge is that there may be no relationship whatsoever between monetary expansion and inflation.
This is still an intellectual taboo, even though central banks everywhere have printed previously unimaginable quantities of new money with no inflationary consequences at all.
In the past 10 years, public borrowing and debt have increased enormously in all advanced economies. But investors, far from panicking about inflation or punishing this supposed profligacy by demanding a higher risk premium, have lent governments money at the lowest interest rates in history.
In many countries, they are even accepting guaranteed losses through negative rates.
Yet the idea that fiscal expansion is irresponsible or ineffective, and that monetary policy should therefore continue to be the main tool of macroeconomic management, still prevails, especially in Europe.
The big story of this year’s IMF annual meeting is that this anti-Keynesian bias has completely vanished among central bankers.
The main message of the keynote address by Kristalina Georgieva, the IMF’s new Managing Director, was an appeal for “fiscal policy to play a more central role". You should definitely watch it.
The new European Commission’s members who are responsible for enforcing the European Union’s outdated fiscal rules, written in the heyday of late-twentieth century monetarism, have begun to admit publicly the need for less restrictive budget policies.
And the permanent head of the EU department responsible for assessing national budgets has called for a “more balanced policy mix,” involving more expansionary fiscal policy “right here and right now".
In short, central bankers and senior economic officials now almost unanimously believe that monetary policy has reached its limits and that fiscal policy should be reinstated as the main tool for managing business cycles and supporting economic growth. But many politicians, especially in Europe, still refuse to recognize that the monetarist era is over and that Keynesian demand management is the only alternative.
So what does this mean for markets ?
To paraphrase my friend Dylan Grice, who recently started re-writing his Popular Delusions newsletter (subscribe here):
So I think we are drifting into a new policy regime. Does that mean we’re moving into a new market regime too? The end of the gold standard certainly ushered in a new financial market structure, reflecting the era’s new inflationary environment. Real assets were in, basically, while nominal assets were out.
But ultimately, the ‘good old-fashioned’ CPI inflation will come. The key MMT idea that government spending will be limited not by some maximum deficit, but by inflation implies that someone somewhere in one of these government departments is able to precisely and reliably forecast inflation. I don’t think that person exists.
Therefore, the new target for central banks will effectively become sharply rising inflation. Inflation will become volatile. Policy responses will be clumsy, unpredictable and difficult to time. This will be reflected in higher risk premiums in asset markets. And, if MMT, even by stealth, is ultimately CPI inflationary in a way that QE was not, MMT will be market deflationary in a way that QE was not.
Ray Dalio of Bridgewater Associates echoes some of these ideas on his recent article - The World Has Gone Mad And The System Is Broken.
B. Why Write & Share: One of the reasons I write this email weekly is because I think we can all benefit from what is in each other’s head.
The thing is original ideas aren’t as original as they seem.
Arthur Schopenhauer once said: “The task is not so much to see what no one has yet seen, but to think what nobody yet has thought about that which everybody sees.”
Or as John Hegarty said: “The originality of an idea depends on the obscurity of sources.” By reading lots, we begin to blend together ideas, people, and experiences. Then we look for connections among them.
You and we can all do the world a service when you make an important idea more accessible.
It turns out that you’ll be surprised how much you know that other people don't & how much everybody will benefit from you sharing your knowledge.
C. A few things worth checking out:
1. According to Professor Adam Grant, we should stop trying to raise successful kids. Parents should prioritize nurturing kindness instead.
2. My friend George Rzepecki was on the Invest Like the Best podcast discussing early-stage investing in Africa (disclaimer: I’m an LP in his fund)
3. My friend Harry Stebbings had Ben Horowitz of a16z on his podcast to discuss his latest book, which I’m looking forward to reading and while you are listening to Harry, also check out his interview with Lisa Edgar of Top Tier Capital discussing how they evaluate VC fund managers (disclaimer: I’m an LP in Harry’s fund Stride)
D. You are what you repeat.
One of the ideas that has stayed with me is from James Clear’s book - Atomic Habits:
"Your outcomes are a lagging measure of your habits.
Your net worth is a lagging measure of your financial habits.
Your weight is a lagging measure of your eating habits.
Your knowledge is a lagging measure of your learning habits.
Your clutter is a lagging measure of your cleaning habits.
You get what you repeat."
What are you repeating in your lives ?
E. Quotes I’m thinking about:
“The trouble with market research is that people don’t think what they feel, they don’t say what they think and they don’t do what they say.”
- Rory Sutherland quoting David Ogilvy
“I think the tragedy in life is to be so timid that you don't play hard enough..."
- Charlie Munger