Navigating An Experimental Economic Environment


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Our generation of investors must navigate an anemic global economy that was inconceivable only a few years ago, unmoved by zero interest rates and bursts of experimental monetary policy. Entrepreneurial drive or “animal spirits,” which hitherto ignited capitalism, seem eerily absent whilst (perhaps not unrelatedly) global wealth and income is stealthily concentrated in an ever narrower elite.

Floundering in the center of this novel and experimental environment is Europe. Economist Nouriel Roubini, speaking earlier this year at the CFA Institute Middle East Investment Conference, suggested that the eurozone “is in trouble — one shock away from outright full deflation and another recession. The European Central Bank (ECB) has finally come to the point of conducting sovereign quantitative easing (QE).” Roubini believes this has three implications for investors: “First, the value of the euro is going to keep falling toward parity with the US dollar. Second, European equities are going to continue to rally once the noise about Greece is resolved. Third, bond yields in the eurozone are going to fall”. Meanwhile, sitting serenely outside the troubled Eurozone and atop a surge in London house prices, the UK economic engine seems to be running well.

At the forthcoming CFA Institute European Investment Conference, several distinguished speakers will address European economic conundrums. Michala Marcussen, CFA, global head of economics at Societe Generale Corporate and Investment Banking, will assert that Europe’s recovery requires domestic demand growth. Marcussen believes that low oil prices have been a welcome boost, but currency depreciation is not a viable growth driver and reform at the national and institutional level hold the key to euro area growth. Economist and former ECB executive board member Lorenzo Bini Smaghi will consider whether Europe’s political authorities can change institutions and share sovereignty ahead of the next financial crisis, or whether a crisis is necessary to bring about those changes.

In a zero-sum economic world where competitive currency devaluations arbitrage access to limited pockets of growth, Roubini argues, “from a global point of view, the decline in oil prices is positive overall because income is redistributed from those economies with a higher marginal propensity to save (oil-exporting economies) to those that have a higher marginal propensity to consume (oil-importing economies).” Two sessions at the upcoming conference connect to this investing theme: David-Michael Lincke, CFA, head of asset management at Picard Angst, will discuss commodities as an asset class, and Charles Robertson, global chief economist and head of the macro-strategy unit at Renaissance Capital will examine whether Iran is likely to welcome broad foreign investment, economic reform, and liberalization, or a more conservative approach focused on foreign direct investment primarily in its energy sector.

Why is our current economic cycle so hard to interpret compared to previous ones? Professor Amir Sufi of University of Chicago has previously declared that “the purely cyclical view of the recession is losing credibility” — in other words, there is no cycle. Instead, and somewhat depressingly, Sufi sees only “secular stagnation,” whereby secular trends in the economy make it extremely difficult to generate enough demand to sustain economic growth; somewhat like Japan’s experience over the last twenty years. “I would argue that some of the growth that occurred during 2000–2007 was actually artificial. Now, the weak economy is being exposed and former sources of growth, such as housing, are no longer available.”

Also at the CFA Institute European Investment Conference, professor Dan Ariely of Duke University will evaluate how we think about money. At the recent CFA Institute Annual Conference in Frankfurt, the nature of money certainly proved a lively topic with delegates actively engaging with claims from Charles G. Cascarilla, CFA, that Bitcoin could help resolve some of the current financial system’s problems.

  • Global Economic Outlook: Opportunities and Challenges for MENA Investors, from Nouriel Roubini: The global economy today abounds with uncertainties and advantages, with challenges and opportunities. The energy and oil sector, quantitative easing, and renewed growth in some countries are especially important as the world continues to move past the global financial crisis.
  • Bitcoin, Blockchain, and the Future of Financial Transactions, from Charles G. Cascarilla, CFA: Bitcoin is a new financial system that has the potential to have a big impact on the way the world does business. Its open ledger system and distribution network make it a valuable system. Although it is still in its infancy, as bitcoin becomes larger and more sophisticated, it may very well provide solutions to many of the current financial system’s problems. Bitcoin might not be as good as our main financial system, but I want to illustrate how useful it can be through these three examples: Retail purchases, remittances and he underbanked market.
  • Seeing Investors’ Reality as Our Profession’s Reality, from Charles D. Ellis, CFA: Practitioners in the investment industry often succumb to common behavioral biases that lead to inflated estimates of the value that is being delivered to clients. To raise the standards of professionalism in the industry, practitioners should help clients understand their true goals, use index funds whenever possible, and reduce fees to a level commensurate with the real value added.
  • House of Debt, from Amir Sufi: Many claim that the anemic economic recovery since the Great Recession is because of the severity of the downturn, but others believe that the US economy has been in a period of secular stagnation for several years, masked by easy access to credit that has distorted economic reality. Various causes of the stagnation include the substitution of capital for labor, the increased productivity of capital, reduced capital expenditures relative to market capitalization, and most importantly, greater income inequality. A potential consequence of the income inequality is that the wealthy do not spend as large of a proportion of their income, which puts stress on financial stability and economic growth.
  • What Is Next for Bond Yields?, from Steven Major, CFA: The Fed is planning a lift-off of rates that, because of the unprecedented circumstances, it does not know how to do. At this difficult juncture, with the Bank of Japan and European Central Bank running accommodative policies, forecasting bond yields requires more than analysis of cyclical data. A deeper understanding of what is driving rate expectations and the yield curve is necessary.
  • Managing Credit Creation—Beyond Inflation Targeting, from Lord Adair Turner: Bank capital and derivatives regulation are not sufficient to avert another global financial crisis, primarily because of a buildup of excessive bank lending in real estate. Future policies must prevent the buildup of real economy debt and leverage to excessive levels. Monetary policy and macroprudential policy together must play a role in constraining and influencing both the quantity and the allocation of credit within the economy.

These discussions suggest that investment practitioners might benefit from upskilling to better identify successful strategies in this novel economic milieu. Sessions at the CFA Institute European Investment Conference will discuss equities, real estate, and insight from behavioral finance — including behavioural economist and Financial Times columnist Tim Harford, who will be asking how can we see into the future, given the questionable forecasting record of some of the world’s greatest economists.

Join your fellow investment professionals this November in London to gain fresh insights and strengthen your technical expertise whilst networking with like-minded leading investors from across Europe.

Keep up with the event by subscribing to the European Investment Conference blog.

All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

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