IT IS an enormous privilege, and responsibility, to write for The Economist and capture a small sliver of readers’ attention. All told, there have been well over a thousand posts on this blog (the site history runs for 98 pages) as well as 546 print columns (the last will appear at the end of the week). The first post, back in February 2009, was written in the depths of the crisis and “was looking for signs of hope, although without any confidence it can call the bottom exactly.” In fact, the market bottom occurred only a few weeks later. There have been a few wobbles along the way but that bull run is still going. The irony would be that, just as the start of this blog heralded the upswing, the last post might signal the demise of the great bull market.
This blogger has been a bit gloomy during his tenure, too gloomy as it turns out. So as well as three signs of danger, I wanted to close with three signs of optimism. First, the concerns.
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We have had the party, but not the hangover. One reason why quantitative easing (QE) worried me was that it was a continuation of the policies seen since 1987; every time the markets wobbled, the central banks changed monetary policy to help them out. This became known as the “Greenspan put”. In the long run, this approach helped fuel speculative bubbles; traders tend to take more risk because they can rely on the authorities to rescue them. In turn, this makes successive crises bigger and bigger. That is why we ended up with QE, and such a prolonged period of low and negative rates. And we still have very high debt ratios, relative to GDP, along with developed economies that are not growing as fast as they were before the crisis. We have fended off the hangover by drinking more. Central banks, led by the Fed, are trying very slowly to dry us out. But a lot may go wrong as they try to do so.
Politics is more important than investors think. The best rule of thumb for investors over the last 30 years has been to ignore geopolitical developments; two Gulf wars, 9/11, civil wars in the Middle East and changes of President from Republican to Democrat (and vice versa) have had little impact. But the fact that financial markets have outperformed the economy has left many voters dissatisfied. The result has been the rise of populism. Admittedly, populism is used too easily as a catch-all category for “policies we don’t like”. There is something deeply worrying about recent developments, however; they defy rational analysis. In America, blue-collar voters who backed Donald Trump have seen the administration target tax cuts, not at them, but at the rich; this fiscal stimulus came almost nine years into a boom. Many of those who backed the tax cuts opposed Barack Obama’s 2009 stimulus, when the economy was in dire straits. American trade policy is driven by the bizarre mercantilist notion that imports are a burden and that a deficit means other countries are “cheating”; these notions were refuted by Adam Smith back in 1776. In Britain, the two main parties are led by ideologues of the right and left who seem to relegate the economic health of the nation to second place. In a world that depends on co-operation, there is too much nationalism. This will not end happily.
We have been better at creating claims on wealth than wealth itself. The finance sector is incredibly ingenious. But it always overdoes it. February’s market wobble was linked to bets on the continuation of low volatility. These kind of products play no useful economic role; they are the financial equivalent of people who bet on the score at half-time in the Super Bowl or the name of the next Royal baby. Let these things run for long enough and they get too big, just like the structured products linked to subprime mortgages that caused the last collapse. A related worry is that we have promised people generous pensions in their old age (particularly public-sector employees), but not put aside enough money to pay for them. This claim on wealth has yet to come due but when it does, the only options will be higher taxes or broken promises.
But there are some hopeful signs.
Technology is lowering the cost of finance. Exchange traded funds based on volatility are a stupid idea, for most people. But a broad-based ETF that allows people to own the S&P 500 for a fraction of a percentage point is a boon (ignore the “passive funds are socialism” notion). It is the kind of cheap innovation that technology has delivered in other areas. Similar things have been happening in areas like payments and money transfers. Technology also means that more people in the world can get access to simple financial products, via their mobile phones.
And technology could improve other parts of our lives. One thing the internet does well is to connect human beings and give them access to a vast treasure of information and ideas. We focus on the ugly things: the internet trolls and the conspiracy theorists. But good ideas can spread much more quickly too. Chinese society was an enormously fertile source of ideas before 1400; now it is reconnected with the world, it can be so again. Driverless cars could reduce accidents, and the need for huge car parks; gene editing may allow us to tackle nasty diseases; renewable energy could help us tackle climate change and so on.
Emerging markets are actually emerging. As writers such as Steven Radelet, Stephen Pinker and the late Hans Roslin have explained, there is plenty of good news in the world. The proportionate rate of extreme poverty has halved, people are living longer, getting more access to basics like electricity, and girls are going to school for longer. Economic power may be shifting to Asia, but that continent holds the majority of the world’s population. From the point of view of the median human, things are getting better. In the end, that is more important than what happens to the markets.
And that’s it. The Von Trapp family (pictured above) were known for singing their farewells but they did escape to another country. And this blogger will also turn up elsewhere, writing a new column on work and management, called Bartleby (with associated blog), in a few weeks. Hope some of you will migrate with me.