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It always takes a crisis to shake up economic thinking. The 1930s Great Depression set policy on a far different path, ushering in a Keynesian era where governments used budgets to fine-tune growth and inflation. That orthodoxy came crashing down in the raging inflation of the 1970s. From there, monetary interventionists emerged as the leading macroeconomic managers. The cult of the central banker was born. (Fed Chairman Greenspan could have stuck a licked finger in the air to convince the public of the economy’s direction). In the mid-2000s, central bankers would boast of having achieved a “great moderation”: Economic and inflation variability had apparently been tamed.
Enter the present. We are now at another historic inflection point, where the pendulum of fiscal and monetary orthodoxy is swinging in a different direction. Why? Look no further for evidence than global prices rising at a double-digit pace for the first time in nearly four decades.
Many did not see this coming. In fact, a strong consensus in the 2010s held the view that inflation and growth were permanently low for structural reasons. Poor demographics and productivity would keep growth sluggish, while globalization and digitization would keep inflation muted.
This has all been proven wrong. It turns out that the developed world can produce inflation after all. Yes, it took the Covid pandemic to unleash extraordinary actions. Governments, knowing that monetary policy would never be enough, launched their largest spending program since World War II. The combination of lockdowns and fiscal largesse was highly inflationary, amplified by the spasms and reflexivity of global supply chain disruptions.
Where to next? The key is to recognize that these inflationary impulses have longer-running support: a structural rise in government spending and investment. An aging population needs more healthcare services. The West needs to spend more on defense to counter threats from Russia and others. Climate change and the need for energy security will boost state investment in renewables. And heightened geopolitical tensions are leading policymakers to spend more on industrial policy. The key Super Trend for the 2020s is bigger government.
Investors should not lose sight that fiscal thrusts pack a bigger punch than the monetary variety. Money is channeled directly to households or businesses. Conversely, central banks can only inject more spending power into the economy via an indirect channel: the cost of money.
Looking ahead, even with the end of pandemic stimulus, broad enthusiasm around the world for more deficit spending still exists. The rolling crises of the last two decades have shaken the public’s trust in established ways of thinking. An enormous appetite now exists for new solutions to the issues facing modern economies.
Stephanie Kelton, leading proponent of Modern Monetary Theory, best captured the mood: “Austerity is a failure of the imagination.” Whether investors agree with MMT or not is irrelevant. Even with the massive Covid stimulus behind us, the policy trajectory has already been set in favor of continued deficit spending. The bar is finally open.
The risks and opportunities in this brave new world of higher government spending and higher inflation are numerous. However, a key orientation for investors is to recognize that the investment leadership in the 2020s will be the precise opposite of the post-GFC 2010s. Back then, in an environment of weak broad-based growth, investors clung close to shore: the U.S. dollar was chronically strong, American assets increasingly commanded an ever-steeper premium and growth stocks trounced their value-oriented counterparts.
Expect all this to steadily reverse. Investment classes that struggled with chronically weak demand and dismal pricing power in the last decade are now primed for multi-year outperformance: select resource-exporting emerging market equities, global sectors with pricing power (banks, industrials, healthcare), and international value stocks which trade on far lower earnings multiples and far higher dividend yields. The real failure of imagination, then, will be to remain anchored to the secular stagnation of the 2010s and assume that environment will last forever. It never does.
Tyler Mordy, CFA, is CEO and CIO of Forstrong Global Asset Management Inc., engaged in top-down strategy, investment policy, and securities selection. The Forstrong Global Investment team contributed to this article. This article first appeared in Forstrong’s “2023 Super Trends Report: Metamorphosis” publication available on Forstrong’s Global Thinking blog. Used with permission. You can reach Tyler by phone at Forstrong Global, toll-free 1-888-419-6715, or by email at tmordy@forstrong.com. Follow Tyler on Twitter at @TylerMordy and @ForstrongGlobal.
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The foregoing is for general information purposes only and is the opinion of the writer. The author and clients of Forstrong Global Asset Management may have positions in securities mentioned. Performance statistics are calculated from documented actual investment strategies as set by Forstrong’s Investment Committee and applied to its portfolios mandates, and are intended to provide an approximation of composite results for separately managed accounts. Actual performance of individual separate accounts may vary with average gross “composite” performance statistics presented here due to client-specific portfolio differences with respect to size, inflow/outflow history, and inception dates, as well as intra-day market volatilities versus daily closing prices. Performance numbers are net of total ETF expense ratios and custody fees, but before withholding taxes, transaction costs and other investment management and advisor fees. Commissions and management fees may be associated with exchange-traded funds. Please read the prospectus before investing. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.
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