You say you want a (fiscal) revolution

CEO tells WP the pandemic has ushered in the start of a monumental regime change and policy breakthrough

You say you want a (fiscal) revolution

WP presents a weekly series with Forstrong Global CEO and CIO Tyler Mordy highlighting and analysing seven macro super trends for 2021. In part one, he explains why we are heading into an era of higher growth.

Genuinely traumatic events inevitably shake up the status quo. Whether it’s monumental global catastrophes like the Second World War or economic crises like The Great Depression or 2008, they are the spark for change. We are now living through another seismic shift.

As the world slowly recovers from the COVID-19 bombshell, many in the wealth industry are debating whether we are in a stock market bubble and speculating about an impending growth slump.

Tyler Mordy, CEO and CIO at Forstrong Global, believes the pandemic is not another 1999 or global financial crisis and that rather than heading into a downturn, we are instead barrelling into an era of higher growth. Regime change is here – and it is taking the form of a fiscal revolution and policy breakthrough.

But revolutions, while clearly signposted in hindsight, are in reality protracted periods, decades even, where the existing order disintegrates and replaced with a new way forward. This is always messy but, Mordy told WP, different people and different institutions with different agendas eventually become fused into a more or less stable constellation. Radicalism ultimately wins.

He said: “It is this backdrop — the early stages of an unstable and stealth regime change — where investors stand in the early days of 2021. The issue at hand is how to create higher and more sustained economic growth.

“The revolution taking place is in the realm of global policy thinking. How should policymakers respond to a persistently slow growth era and one where coronavirus will cast a long shadow?”

To understand Mordy’s answer to this, it’s important to look back on the evolutionary nature of the history of global policy thinking and how an urgent desire for change — for fast resolution to turmoil — is characteristic of any crisis.

The Great Depression, for example, 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, central bankers emerged as the leading macroeconomic managers.

By the mid-2000s, they would boast of having achieved a “great moderation”: economic and inflation variability had been tamed. Everyone agreed that monetary policy was the most effective tool for managing the economy.

All that changed after 2008’s global financial crisis. To fight the downturn, worldwide central banks pursued near unfettered monetary expansion: an additional USD $16 trillion amassed on their collective balance sheets. But it didn’t work out as planned: central banks consistently fell short of both their inflation and growth targets, and governments flatly refused to engage the fiscal lever in a meaningful way.

Buzzwords like “deleveraging”, “austerity” and “balanced budgets” were in vogue. Mordy added: “Monetary policymakers were forced to carry the entire policy burden — grumbling the entire way and becoming the world’s leading fiscal stimulus evangelists.”

It was a period which he calls a “long workout period”, required to address a lot of the imbalances of a “classic recession” during a period characterized by slow growth and secular stagnation. This era – from 2008 to 2020 – has now been dramatically brought to a close.

Mordy said: “The coronavirus has completely reset the economic cycle and provided policy breakthroughs all around the world. The period from 2008 to 2020 was defined by one word: ‘austerity’. Nobody is pursuing that now. It’s quite the opposite.

“This health crisis has totally spurred on this policy breakthrough. Now we're throwing fiscal stimulus at a global economy that doesn't have the imbalances that were present in 2008. We have already been through a long workout period. So, we are entering a period of higher growth - all the worries about broad-based stock market bubbles and slumping corporate profits are premature.

“We will see a productivity boost and a growth boost, and the path of least resistance for most stocks will be up.”

Investments that excel in the new era will embrace steadily rising inflation and higher global economic growth. Capital that was timid from 2008 to 2020 – hence the strength of the U.S. markets – is now less cautious and moving into Asia, Latin America and commodities.

This has been propelled by more than USD $12 trillion in fiscal support, which was pumped into the economy to fight the impact of Covid-19. And there is much more on the way from the new Joe Biden-led U.S. administration alone. In Canada, the deficit last year will likely be six times greater than the largest one in the country’s history, while the €750 billion European Union recovery fund ratified in July is an historic agreement.

Mordy said: “A consensus amongst policymakers has emerged: the risks of doing too little greatly exceed the risks of doing too much.”

Underpinning all of this is a rapidly ascending school of thought called Modern Monetary Theory (MMT). Its central premise is that federal governments are unlike households because they have the power to issue their own currency. Therefore, all the handwringing and ink spilled over governments going broke are misplaced.

According to MMT proponents, when governments try to manage their finances like households, they miss out on the opportunity to harness the power of their currency. Above all, the theory is a new way of thinking about the potential for higher fiscal spending. As one of its leading proponents, Stephanie Kelton, has noted: “austerity is a failure of the imagination”. 

Mordy explained that policymakers are steadily moving towards the adoption of its ideas. And MMT arrives at a ripe time, with the past two decades having shaken the public’s trust in established ways of thinking. MMT provides support for a new policy approach.

In reality, this fiscal policy revolution has been stirring for some time. The past decade was characterized by slow growth, deleveraging, dis-inflation and skittish investor sentiment from 2008. As a result, investors aggressively bid up assets not linked to broad economic growth: tech disruptors, growth stocks and fixed income. The U.S. dollar was also chronically strong, perceived as the safest house in a post-crisis neighbourhood.

What will change this situation? Growth — and a return of some inflation.

“Investors should not lose sight that fiscal thrusts pack a bigger punch than the monetary variety,” Mordy said. “Importantly, the transmission effects are much more direct, boosting consumption, investment and liquidity. More money immediately enters circulation. Inflationary pressures increase.

“Many may protest fiscal policies which can lead to currency debasement or simply steal growth from the future. Those are worries for another time. At this point, markets are nowhere close to pricing in higher growth. Cyclicals and value stocks, nearly left for dead by most investors, are starting to show life. US assets will falter relative to other countries as capital becomes braver in its search for alpha.

“Make no mistake, this is the beginning of a massive shift in investment leadership. The coming spectacle, in the parlance of another era, will be quite a trip.”