If your outlook on risk assets and the economy isn’t “constructive” headed into 2020, and if you’ve put your money where your mind and mouth are by placing bets on some manner of dour outcome in the near- to medium-term, you’re implicitly taking the other side of Stanley Druckenmiller’s positions.
Good luck with that.
In a lengthy interview with Bloomberg TV, Druckenmiller delivers a simple rationale for his relatively bullish take. Have a listen:
“Well, you have very low unemployment here, you have fiscal stimulus in Japan, you have fiscal stimulus and a lot of confidence coming to Britain, we’re running a trillion-dollar deficit at full employment, apparently we’re going to have some kind of green stimulus in Europe and we have negative real rates everywhere and negative absolute rates a lot of places”, Druckenmiller said.
These are simple points, and although regular readers and those who keep themselves generally apprised of the proverbial state of play are undoubtedly familiar with what follows, it’s nevertheless worth re-running some of the visuals associated with Druckenmiller’s remarks.
First, turning to the US running a trillion-dollar deficit at full employment, there is perhaps no more critical chart in economics right now than the following:
For many, that speaks to the sheer lunacy of Donald Trump’s fiscal policies – in a banana republic-esque attempt to engineer the economic renaissance he promised to voters during his wild campaign, the president piled deficit-funded stimulus atop an already tight labor market. The result is a historically anomalous scenario (outside of war time, anyway).
Why is this lunacy? Well, for one thing, cutting corporate taxes and handing the wealthy a massive windfall is a policy prescription with a dubious track record. Supply-side economics doesn’t work. Assuming this time won’t be different, all Trump has done is mortgaged America’s future in order to hand more money to corporate “citizens” and rich people in the present. Beyond that, the tax cuts have thus far been largely Ricardian equivalent.
Initially, that push to overheat the economy forced the Fed to lean more hawkish than they otherwise might, but that’s been reversed.
The US thus enters 2020 with accommodative monetary policy and an economy that, while not benefiting from the same fiscal sugar high as 2018, is still defined by government largesse, despite the White House being controlled by an ostensible Republican.
Trump would have more fiscal stimulus if he could (he’s now pretty keen on a “middle-income” tax cut) and Democrats, should they manage to wrest control of the Oval Office and sweep Congress, would surely embark on aggressive spending programs, although the possible rolling back of the corporate tax cuts obviously presents a risk to S&P earnings, and thereby stocks.
Across the rest of the world, the fiscal tide appears to be turning. Japan is set to roll out new measures in a bid to ward off a recession, for example.
We all know the BoJ continues to corner the JGB market, which effectively means the country is running a real-life experiment with modern monetary theory, although officials have been keen to “dispel” that notion.
“If QE is sizable enough, the transformation in debt-to-GDP ratios can be meaningful”, BofA’s Barnaby Martin wrote in September. You can see that clearly in the following two charts, excerpted from an October note:
“QE helps ‘de-risk’ financial markets, by moving bonds from risk-averse investors towards more risk-tolerant central banks (buy and hold)”, Martin went on to say, in the course of reiterating a handful of points he made following the ECB’s September meeting, when the central bank restarted net asset purchases despite vociferous internal dissent.
The bottom line: Central banks can assist fiscal policy in true “public-private partnership” fashion. “This means that over the longer term, higher sovereign debt levels can be attainable, while keeping bond market ‘tantrum’ risks in check”, Martin assessed.
Remember, the larger the fiscal deficit, the better the growth outcomes, generally speaking. In the absence of inflation, and considering the dormant Phillips curve, the arguments for governments that print reserve currencies not spending to bolster employment and growth are dwindling fast, in what many claim is a new economic paradigm.
Druckenmiller’s points about negative rates are self-explanatory and need no additional editorializing.
In the simplest possible terms, rates are low, real rates are even lower and central banks have cut rates some 70 times globally in 2019, leading to the largest net easing “impulse” in years.
Given the above, you’d forgive anyone for adopting a reasonably benign take on the near-term prospects for asset prices and the global economy, especially at a time when trade tensions have deescalated, albeit only temporarily.
“With that kind of unprecedented stimulus relative to the circumstances, it’s hard to have anything other than a constructive view on markets, risk and the economy in the intermediate term”, Druckenmiller went on to say. “So, that’s what I have”.
He did suggest that it might all end in tears, but reminded investors that timing the apocalypse is notoriously difficult.
“That could be years”, Druckenmiller said of the eventual reckoning. “I’m 66, I might be dead by the time it happens”.