Merlin Weekly Macro: Thinking great thoughts in Davos
The Jupiter Merlin team look at the state of global monetary policy, as ‘the great and the good’ convene once again at Davos to put the world to rights.
As ever, the bond markets are the barometer for market sensitivity to inflation data and investors’ perception of what happens next to interest rates. A more likely explanation for the reaction of surprise is the markets’ agenda for lower interest rates (and sooner) being temporarily frustrated: having enjoyed a significant rally in bond prices in the fourth quarter of 2023 (reflecting a drop in yields in anticipation of falling interest rates) and recouping some of the significant losses incurred in 2022 and much of 2023, as if we did not know it before the upward blip in inflation confirms that the pathway to the 2% target is neither smooth nor linear. Bottoming on 27th December, all major government bond yields have since risen sharply in the New Year, recovering between a quarter and a third of the falls since mid-October (the corollary of which is prices giving up as much of their fourth quarter gains). As we said at the end of 2023 and again at the beginning of 2024, such a wide spread between market expectations and real policy outcomes was confrontational and unsustainable: both could not simultaneously be correct. As is invariably the case with economics, however much the accusation is that it is rearward-looking, the official reported data always provides a sense-check between reality and aspiration or hope.
Thinking Great Thoughts in Davos
However, Davos has an uncanny habit among electorates of appearing detached. It unwittingly reinforces the distinct feeling of them-and-us: ‘we the elite will be discussing matters too complex for the great unwashed to comprehend; don’t worry your pretty little heads, people.’ The Davos conference is only upset occasionally when, for example, Greta Thunberg turns up and delivers a great big kick squarely in the political proverbials about climate change; or The Donald, completely connected to the grass roots, appears liberally lobbing verbal hand grenades with the pins taken out, as he did in 2020, and cheerfully watches the trail of diplomatic destruction in his wake; or in 2017 the Chinese General Secretary surprising the world with his presence and letting us all into a great big secret that he is the living embodiment of sshhh, whisper it…..a globalist (to which he might have added, but did not, ‘and by the way, comrades, lest there be any confusion: when I say I’m a globalist, what I mean is that by 2049 I expect all roads globally to lead to Beijing’).
Christine Lagarde, thoroughly at home at the Alpine retreat
Among her peers at the Fed and the Bank, Lagarde is unusual: she is neither an academic nor a career economist; instead, she is a lawyer by background, and as a former French trade and agriculture minister, a politician to her fingertips. And as we discussed in last week’s column, akin to simultaneously juggling and dancing on the head of a pin, she has the unenviable and impossible task of successfully managing 20 countries’ economies with no fiscal union but with one interest rate; but while her peers rise above the humdrum of national politics, even though Lagarde is careful to guard the ECB’s independence from political influence, her well-tuned, innate political antennae are always twitching.
We must do something; this is something; therefore we must do it
Leaving aside credibility in the new era, her problem is that for seven years from December 2015, she and her predecessor, Mario Draghi, deployed ultra-loose monetary policy in the eurozone including a negative central bank deposit rate which along with aggressive QE ultimately led to a multi-year period of negative government bond yields. Unlike Quantitative Easing in the UK and the US which had principally been deployed as a financial defibrillator to shock the financial system out of its near cardiac arrest in the Global Financial Crisis, the ECB’s implementation of QE was designed to stimulate economic growth. But thanks to that lack of fiscal union and a multiplicity of frictional elements including tight regulation in the financial and economic fabric, the eurozone economy failed to respond to the massive stimulus. GDP remained disappointingly slow and sub-par to the point where far from having a multiplier effect on the economy, every marginal euro of QE was obeying the law of diminishing returns tending towards zero. In economist speak, it was a “failure of the transmission mechanism”. Through its mechanics, QE created asset price inflation and caused valuations in different income-generating assets (bonds, equities, property) to begin positively correlating as each class became successively more expensive and investors moved on to the next to find cash income at a reasonable value; but it failed to percolate down to the real economy and the consumer to deliver sustainable growth, let alone accelerating economic activity.
The question is, before she and her peers embark on the loosening phase of the monetary policy cycle, what have they learned from a decade or more of experimenting with what at its inception was regarded by orthodox economists as heretical policy? What will the central banks do differently next time that avoids the economic pratfalls and indeed the unintended social and political consequences that became only too evident in the post-GFC economic environment. Time will tell.
Who’s there and who’s not
Equally revealing is who is not there, or who sends the B Team instead. Putin obviously is absent in person because he’s on an international sanctions list and would promptly be arrested; but in deep domestic trouble, also absent is Olaf Scholtz from Germany; and our very own Rishi Sunak, currently preoccupied navigating his Rwanda deportation policy through Parliament. Although the Americans nearly always send a delegation (this year led by the frenetically peripatetic Secretary of State Anthony Blinken) but unlike Donald Trump, Joe Biden himself has never been while President. Given he put a firm marker down at the G20 conference in India last September about the future being “the Global South”, it is also surprising that while sending a very on-message cabinet team, Prime Minister Modi himself is absent to reinforce his determination to be one of the big players. China has sent the biggest delegation under the leadership of the Prime Minister but the General Secretary, Core and Helmsman, is nowhere to be seen: he personally has nothing to add.
As an exercise in people-watching, Davos is about as fascinating and surreal as it gets. And a year from now, they will know whether Donald the Terminator Trump will be back. Hold on to your hats, it could be a bumpy ride!
The Jupiter Merlin Portfolios are long-term investments; they are certainly not immune from market volatility, but they are expected to be less volatile over time, commensurate with the risk tolerance of each. With liquidity uppermost in our mind, we seek to invest in funds run by experienced managers with a blend of styles but who share our core philosophy of trying to capture good performance in buoyant markets while minimising as far as possible the risk of losses in more challenging conditions.
Authors
![Amanda Sillars Jupiter Fund Manager and ESG Director Independent funds](https://www.jupiteram.com/uploads/2021/01/96f01f655a8de35f0c3eb2102c6a3cfd/amanda_sillars_350x350.jpg?r=684f93e5977a727670c1fa21d640fea0&v=1640779274)
![Algy Smith-Maxwell Jupiter Research Director Independent Funds](https://www.jupiteram.com/uploads/2020/06/6162cf8ec89b0753d316654c3403bcd9/algy_smith-maxwell_350x350.jpg?v=1640779072)
![John Chatfeild-Roberts Jupiter Co-head of Strategy Independent Funds](https://www.jupiteram.com/uploads/2021/01/e7456f93b5fbf12d1a95149a88299506/john_chatfeildroberts_350x350.jpg)
![George Fox Jupiter Assistant Fund Manager Independent Funds](https://www.jupiteram.com/uploads/2021/01/60e7b31ad73afe2c39b2c6c8b0d8789c/george_fox_350x350.jpg?v=1640780876)
![Alastair Irvine Jupiter Investment Director, Independent Funds](https://www.jupiteram.com/uploads/2021/01/2312f526c8a3d1a1c3195604038fdabc/alastair_irvine_350x350.jpg?v=1640778798)
![David Lewis Jupiter Co-head of Strategy Independent Funds](https://www.jupiteram.com/uploads/2021/01/d15bf39db17ee660c5f0266ec2fc3f1a/david_lewis_350x350.jpg?v=1640780302)
![Venetia Campbell](https://www.jupiteram.com/uploads/2023/05/cf08d06b5dae5b95d1ca9cc48e647a07/venetia-campbell_rgb_350x350px.jpg?r=200012e584620e492d211cdc7a698f1a&v=1707125295)
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