Tim Bond was a partner at Odey Asset Management until March 2022, having joined in 2010 as its head of macroeconomic strategy, and managed the Odey Odyssey long-short macro fund. He is now senior non-executive director at The Law Debenture Corporation.
“You are effing useless,” was the informed verdict from management, as they myopically closed my hedge fund in the middle of 2021.
To be fair, the markets apparently held a similar opinion of my abilities. Anyone who had predicated their investments on rampant inflation and a dual bear market in bonds and equities was not looking too clever at that point.
Yet the call had seemed the most obvious of my career. Mixing massive money printing with massive fiscal easing can only ever have one possible outcome. Even the details about the LDI-inspired collapse in the gilt market were obvious enough, once you spent a few hours digging out the facts and applied a modicum of common sense. In fact, the only unexpected bit was me no longer running a fund when it all eventually happened. Effing useless, indeed.
It’s tempting today to assume that the worst might be over, at least for the markets, as monetary tightening precipitates an inflation-busting recession and the world returns to a familiar lowflation landscape. As likely as it might seem, such an outlook is impossible. The underlying economic condition of a structural slowdown in trend growth rates has not gone away.
What has gone away is our ability to hide the problem. QE, negative interest rates and rising indebtedness were the product and palliative of a condition caused by a prolonged deceleration in productivity growth to an average pace not seen since the 19th century.
Real wages stagnated for several decades on the back of this deceleration, whilst asset prices soared due to the evaporation of risk-free interest rates. By redistributing shares of wealth and income to the high-saving top 10 per cent, the economic mix ensured that demand and inflation fell short, simultaneously dismantling the social contract that keeps politics non-toxic. Meanwhile, zero interest rates worsened the productivity slowdown by artificially prolonging the lifespan of the least productive enterprises.
Then came Covid. In an economic condition of parlous growth, most developed countries responded to the shock by spending money, largely financed by central bank printing presses — some 13 per cent of GDP in the UK, 21 per cent in the US. This was a live experiment with the magic money tree, a policy long advocated as an antidote for the slow growth condition.
The net result, with a supply side constrained by negligible productivity growth, deglobalisation, geopolitical instability and the exigencies of the pandemic, was soaring inflation. This exercise has taught us that the monetary-fiscal escape route from slow growth is a delusion — a lesson that the inattentive Liz Truss administration in the UK was retaught in short order.
The exercise also taught us that negative real interest rates and QE are indeed potentially very inflationary. The policy palliatives of the past are therefore no longer available to mask the effects of very low trend growth rates. As such, we are left with the debt accumulated over the past decades and the question of how that debt will be serviced if trend growth rates continue to stagnate.
According to the BIS, since the start of this century, advanced economy non-financial debt (that is debt owed by governments, business and households) has risen by 86 percentage points of GDP to just shy of 300 per cent of GDP. The world has never been as levered as it is today.
When central banks were able to suppress interest rates well below the trend rate of nominal GDP growth, these magnified debt burdens were supportable. Now, with rising wages signalling a self-reinforcing inflationary cycle, our range of options has narrowed to a choice between high inflation, a debt default crisis or exceptionally painful fiscal austerity.
At considerable risk of understatement, all three of these choices will cause havoc for the ordinary citizen-voter. Indeed, when you extrapolate the likely outcomes, it becomes clear that all three present existential challenges to the social fabric. They are not, therefore, really choices at all.
There is, however, a fourth choice, which is to deal with the root problem, the long slowdown in productivity growth. To do so, countries need to dismantle the oligopolies that are suppressing innovation, eradicate the influence of corporate behemoths on self-serving regulations, wean economies off the enervating drug of cheap globalised labour forces, improve the quality of education and kill off zombie businesses. And all of this needs to be accomplished within the ever-tightening constraints imposed by our environmental degradation. There is little point in increasing output per hour if that output speeds the destruction of Spaceship Earth.
Despite the evidence of the above, I am actually an optimist. I am sure we will, eventually, stumble our way towards the right policy choices that foster an environmentally friendly acceleration in innovation, productivity and economic growth. But the process will be long and troubling, requiring a political willpower and level of general understanding of our predicament that is so far noticeably absent.
For long term investors, the true buy signal will not be some temporary peak in inflation or policy rates, but when people finally comprehend the disease, rather than the symptoms.
Financial markets are not a game; they have an important role to play in all this. Their existence is not solely justified on the basis of efficient capital allocation, but also in assisting the process of optimal policy discovery. If investors remain stupid to the reality that surrounds them, my optimism will most likely prove misplaced.
(Odey Asset Management declined to comment.)
Source: Economy - ft.com
