In the first feature of our new series, Forstrong Global's Tyler Mordy explains why, amid the coronavirus crisis, he thinks the fiscal policymakers are here to stay
WP presents a weekly series with Forstrong Global president and CIO Tyler Mordy highlighting and analysing seven macro super trends. In part one, Mordy compares policymakers to a much-loved dragon-riding franchise, explains how the coronavirus crisis has ‘totally smashed’ orthodox policy making and why he believes fiscal stimulus is the super trend of the foreseeable future. Don’t miss part 2 next Thursday when we’ll turn our lens on Globalization 2.0.
Most movie franchises suffer from the law of diminishing returns; think the vampires of Twilight or Fifty Shades. Not so with How To Train Your Dragon, Dreamworks’ beloved dragon-riding trilogy.
Tyler Mordy, Forstrong Global’s president and CIO makes no secret of the film’s hit status in his household. The series follows its unlikely heroes – a band of misfit Vikings who have learned to coexist with the creatures they once feared — as they face progressively thorny challenges. They evolve as humans and hone leadership skills along the way.
The macro investor believes a parallel is happening in the world of global policymaking. During decades of fighting soaring inflation, deflation and, 12 years ago, the financial crisis, a “dragon” has lurked around every corner. The world is now fighting a particularly fiery beast, the unforeseen COVID-19 pandemic, which continues to exact a huge toll on human life and has decimated markets.
Economically, Mordy believes it has already claimed a significant victim: conventional policy making. As central banks run out of ammunition, despite being armed with a bigger toolbox since 2008, the fiscal policy makers have now arrived … and they’re staying.
Mordy told WP: “When you have a crisis, it accelerates the emergence of new policies that would never get through in a tamer market environment. The COVID-19 pandemic has ravaged daily routines around the world, but it’s also claimed a more subtle victim: conventions and policymaking around the world. Orthodox policy has been totally smashed.”
To know where we’re going, and why this fiscal stimulus behemoth is here to stay, we must know where we’ve come from. Since the formation of the US Federal Reserve in 1914, there have been 16 chairs, many nurturing the cult of the central banker. From cigar-smoking Paul Volcker, who served from 1979 – 1987, to the “maestro”, Alan Greenspan, who invited mystique with his own style of oracular aloofness, these were enigmatic and revered sages.
Stripped of their protective jargon, the Fed had a simple mechanism available to it — a single great lever, a blunt on-off switch for broad economic growth. However, everything changed after 2008. The celebrity has survived, witness the rock-star status of Mark Carney or the extreme savoir faire and luminous glow of incoming President of the European Central Bank, Christine Lagarde. But that simple lever has been replaced with a comprehensive dashboard of quantitative easing, negative rates, and a widespread enthusiasm to experiment with other features.
'The era of massive fiscal spending arrived fast and furiously. Suddenly, the world has changed'
The most experienced pilot of this new operating environment was Mario Draghi, the outgoing President of the ECB. He left a potent legacy. His eight-year term included exactly eight rate cuts and zero hikes, leaving the deposit rate at negative 50 basis points. As a parting shot ahead of his departure last year, Draghi reintroduced QE, cranking up the asset purchases to €20 billion per month. The ECB’s balance sheet currently stands at an eye-watering €4.7 trillion. In his fiery response to the possibility of a Eurozone breakup in July 2012, he immortalized the words “do whatever it takes”, promising to protect the Euro.
But where Draghi really took flight is in consistently conveying that central bank powers have limits and should be more collaborative with fiscal authorities. Lagarde now agrees. And so here we are – 2020 and in the midst of a global pandemic that has stymied the global economy. In a scene How to Train … would have been proud of, this week the Fed broke all kinds of economic taboos by buying unlimited amounts of U.S. Treasuries, corporate bonds and mortgage-backed securities, a move that already extends well beyond what it did in the 2008-09 crisis.
It’s an enormous, game-changing event, Mordy stressed to WP. While the consensus pre-virus was that policymakers are out of bullets, he had stressed that they were not even close to being empty. Mordy now expects more stimulus in the next month than the entire 2008-09 global financial crisis. The Fed has “gone full nuclear” and truly introduced “war-time” measures, which for once is not hyperbole.
He said: “It took a global pandemic, but the fiscal lever has, at long last, been decisively engaged. The collective rush is almost audible as governments everywhere scramble to activate the switch. A growing list of countries are now making announcements to counter the impact of coronavirus.
“Amid crisis, no amount seems too large. Spain initiated spending equivalent to 25% of its GDP. The UK pledged ‘wartime’ funding. Even Germany — long stuck in an ideological logjam — has abruptly broke free. The era of massive fiscal spending arrived fast and furiously. Suddenly, the world has changed.”
After 2008 ushered in a long era of stubborn prudence where deleveraging, austerity and balanced budgets were in vogue, and central bankers were forced to carry the policy burden, Draghi’s forceful wish for a more formal collaboration between monetary and fiscal authorities is happening.
“All this now defines the future,” Mordy said. “And, if political history is any guide, many of these temporary policies will become permanent. Once turned on, fiscal taps will not be shut off easily.”
Forstrong’s base case is that we get through this virus in the next quarter and growth will be returning to trend in the second half of 2020, believing that the legacy of this particular crisis, and a super trend moving forward, will be the enormous fiscal response. “Record low interest rates, stimulative low oil prices, and super-charged fiscal programs will all fuel the post-virus rebound,” he said.
Of course, no one wants to stimulate economic activity right now because you don't want people conversing with each other or contacting each other. “You do want assurances that people can sort of relax for the next month or two,” Mordy added. “But then after that, it's game on.”
He added: “The most important number for investors is not the amount of stimulus, but the rate of new infections. Any positive news on this will loosen coronavirus’s grip on the public consciousness. Investors fumbling around for the right historical analog will come up empty-handed. It is not 1929, 1987, 1999 ... and certainly not 2008. This is 2020 and it is new terrain.
“Our investment team still maintains that coronavirus is a temporary demand shock, rather than a trigger for a longer-running depression. Policy has shifted to a ‘whatever it takes’ approach to dealing with the pandemic. The global banking system is well-capitalized and, most importantly, for the world’s largest economies (i.e. the Eurozone and the US) no major global imbalances exist.
“This means systemic damage that would take years to work through can be avoided, whether a capital spending overhang like 1999 or consumer housing leverage like 2008. Under this view, investors should be looking across the valley. Now is the time to be opportunistic in what has become a historic financial panic.”
Like the third installment of the movie franchise, this represents a maturing of the characters at play. The plot has thickened and central banks’ armoury of post-2008 tools has been worn out and eclipsed by the rocket fuel of unprecedented, immediate fiscal stimulus.
It's here to stay, so ride that fiscal dragon and hold tight, we may only be in the middle scenes of a long journey.