It’s a bird! It’s a plane! It’s Super…
Written by: Benjamin Bimson CIMA® / BCJ Financial Group
Nah, it’s just a helicopter. Helicopter money that is.
What is helicopter money? This is the term that refers to a theory that keeping interest rates near zero for a prolonged period of time, including permanent monetization of budget deficits, will eventually spur economic growth. It is the gift that keeps on giving.
The July Fed minutes were released this past week and it was apparent from that although there was broad based consensus that economics were improving slowly but steadily, there were still various concerns regarding the Brexit, the domestic resilience of inflation (stubbornly low) and stable but slow GDP growth. There was a vote 9-1 not to raise rates in July and language largely remains unchanged.
The minutes released hint that the Fed remains extremely accommodating and willing to continue their policies of low interest rates despite the job growth meeting their targets and inflation inching up. It is looking like helicopter money is sticking around for a stubbornly long time!
This isn’t new information, but the minutes were being anticipated by the markets as it searches for clues for the next potential movement. It does not appear to be upon us yet however, there is an interesting theme we are watching which is monetary policy, and influence in the investment marketplace. It is affecting everything. I want to be clear that it is one of the largest, if not the largest game in town. Here is a chart showing public debt as a percent of GDP. I find the picture fairly self-interpreting. There is no doubt that debt growth is huge.
It doesn’t take a genius to understand that over 100% debt to production (think of this as how much is owed versus the total income…) is far more than historical norms for the US. How high can it go? Well, we can look at how it is for our friends over in Japan. Perhaps it will make us feel better… or maybe it is a roadmap of where we are going. Note that it was somewhere in late 2001 where the Japanese public debt was similar to where we are now.
It’s not necessarily the exact plot we will take, but it is perhaps more likely than not. The good news is that Japan still exists. I am thankful. I like Toyota trucks. But how has their stock market done since 2001?
Here I compare the S&P 500 to the Nikkei 225 to give an idea of the difference in growth of underlying indexes as a total percentage growth over the time. Note that this is reflecting levels of change and doesn’t include the dividends. They have been stripped out of the equation so that you can see the underlying effect the economies have on a level playing field.
No doubt it is easy to see that the US equity markets provided the greater return even net of the Great Recession of 2008. Japan is not done. They have gone to the negative rate atmosphere. Why am I comparing them? We look awfully similar on our rates, just about 15 years behind Japan. Take a look at what the rates look like from 2001 to today for both Japan and the US.
There are a number of arguments that I have heard to explain how we are vastly different, and I agree. I don’t think we are the same, but I do see a lot of correlation between what our Fed is doing and what the Bank of Japan has done.
I believe we can learn quite a bit – reducing the rates supports the stock market, but it works really well for a time and then the affects appear to diminish. This is of course absent any meaningful reforms. If we can get corporate reform, if we can bring back dollars held in corporate accounts overseas, if we can deal with our domestic demographic, tax system, Social Security and political issues… Well, we have a lot of work to do, but things could be different.
I’m not liking how much good helicopter money has been doing in Japan. It seems like a slippery slope that is very hard to get off of, and it appears there is no “free lunch.” Like myself, I think most people don’t want to be like Japan, but can we change courses?
I bring this all up just to explain why we sound like a broken record when we talk about the Fed and why it dominates Wall Street minds these days. It is really the biggest determinant in how this economic game plays out. We cannot beat them, but understanding this helps understand appropriate strategies for how you would want to manage investments and money going forward.
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