Does the current monetary policy environment leave investors and financial professionals in purgatory or hell?
Presented with the question, “Does the current monetary policy environment leave investors and financial professionals in purgatory or hell?” a group of panelists assembled by Informa Financial Intelligence’s EPFR and Fintech company, ClearMacro, earlier this month in London were split down the middle.
According to Bob Parker, Chairman of the Asset Management and Investors Council, “on a scale of one to ten, with one being purgatory and ten being hell, we are at 9.9.” Diminishing returns and a growing list of unintended consequences characterize this era of extraordinary monetary policy as it moves into its second decade, Parker observed.
“The key point [in this debate] is counterfactual: what would have happened if central banks hadn’t acted as they did?” countered Andrew Pease, global head of investment strategy for Russell Investments, who believes that we are going through an extended period of very low interest rates rather than outright financial repression.
That could change. “I think a phrase we’re going to have to lean over the next business cycle is MMT -- modern monetary theory, or magic money tree theory, as some are calling it,” noted Pease. From an investment perspective, he said, being in hell is simpler. “The best you are going to get is your risk premium, so you might as well be fully invested, but if you are in purgatory [with its implication of a return to ‘normal’] then there’s a big revaluation coming.”
Governments and central banks will do what they can to stop that happening, said Arnaud Gandon of Heptagon Capital, who believes policymakers are now committed to banishing the business cycle. “What is wrong with a good, old fashioned recession?” asked Gandon, before answering his own question by pointing to the increasingly political nature of economic policymaking in Europe and other developed markets.
This politicization of the process is a key reason that Rebecca Harding believes current the monetary policy environment is closer to hell than to purgatory. In Harding’s opinion, the role of trade in determining global prices sharply limits the impact of quantitative easing programs, and that impact – already limited when it comes to the real economy – will be further compromised by the ‘weaponization’ of monetary policy. The legal framework allowing the US to designate foreign central banks as currency manipulators is a case in point, she argued.
Looking ahead, all the panelists see more of the same. “In the event of another downturn “fiscal policy is the next cab off the rank,” says Pease, who expects that policymakers “will throw the kitchen sink” to limit the impact. “Are we ever going to see normal economic policies?” asks Harding.
Event Speaker Line-up
Cameron Brandt, EPFR Director of Research
Mike Simcock, ClearMacro CEO/CIO
Andrew Pease, Global Head of Investment Strategy, Russell Investments
Arnaud Gandon, Heptagon Chief Investment Officer
Bob Parker, Chairman of the Asset Management and Investors Council and Senior Adviser to the International Capital Markets Association
Rebecca Harding, Independent economist and CEO of Coriolis Technologies
Sayad Baronyan, Quantitative Analyst, EPFR, Informa Financial Intelligence