The financial crisis of 2008 brought global economies perilously close to a second Great Depression. Only through the coordinated efforts of global central bankers, as well as our political leaders, were we able to narrowly escape profound financial hardship.Central bank policies were able to arrest the impending disaster by driving interest rates to their lowest point in our nation’s history, and kept them there for the better part of a decade. This policy was effective in helping to create a “wealth effect” where consumers, with rising portfolios and home prices, were willing to view risk in the context of opportunity, rather than something to be avoided at all costs.
Zero-bound interest rate policies, initially viewed as stop-gap measures, remained longer than anyone imagined primarily because slack consumer demand produced a slow-growth economy. Low interest rate policies undoubtedly created economic winners and losers. Many of those who got the short end of the stick were receptive to a political message that addressed the yawning gap between the haves (those with appreciating financial assets and home values) and have nots (workers whose incomes have actually declined on an inflation-adjusted basis over the past 15 years).
The U.K. election resulting in them leaving the European Union (BREXIT), and the election of President-elect Donald J. Trump are a reaction to this bifurcated economic reality. Solid economic growth results in a growing pie where everyone benefits, not necessarily at the expense of their trading partners. Slow growth tends to foster a “zero sum game” mentality where your growth is at the expense of mine. This is the fundamental driver for the rise in nationalism that we are now witnessing.
There are structural impediments to ramping up our nation’s growth rate though. Our population is aging, and older people spend less. They get ill more frequently, and their care saps national resources which could otherwise be used to boost economic growth. Productivity, which is the primary driver of wage growth, has stagnated and no one seems to know why. And then there is the white elephant in the room that politicians are loath to address – the impact of robotics and artificial intelligence in the continuing destruction of “good jobs” that leave wide swaths of Americans without viable paths to economic security. Those jobs are gone forever.
What we can expect in 2017 are wide ranging policy changes that could reorder investment winners and losers. First up is a potential change in corporate taxation from where a company operates, to where its sales are. This protectionist policy would favor exports and punish imports. This could be a very big deal. The benefits of proposed deregulation need to be weighed against greater government meddling in how global corporations operate. Potential trade wars may break out in reaction to nationalistic economic policies. Currencies, not arms, may become the weapons of choice in advancing a nation’s economic agenda.
The bottom line is that we are headed for a heightened level of randomness in government policy, which will directly impact the perception of likely winners and losers in investment portfolios. Policy risk has come to the fore, and at this juncture, no one can say with certainty who will win or lose.