The stall-out in the U.S. economy and in most major world economies has baffled policymakers. No matter what they try in today’s economic environment, it hasn’t worked for more than a short period of time. Quantitative easing appeared to work when first tried during the Great Recession, but now, as Japan and Europe have found, there appears to be significant diminishing returns with these unconventional tools. Europe, for example, will substantially increase its bond purchases beginning June 1. Yet with this news, the equity markets there turned lower, not higher as they had in the past. Thus, one of the major transmittal mechanisms of QE, the rather weak “wealth effect,” is no longer working, and may even be a negative. The markets are coming to realize that the unconventional policies have not spurred economic growth, so any announcements of even more such unconventionality is now receiving the cold shoulder.
Policies are problematic
Tax policies in the U.S. are quite troubling. Multinational corporations can’t repatriate billions of dollars of profits earned elsewhere (and already taxed in those jurisdictions) without paying an additional 35 percent to Uncle Sam. This leads to such crazy corporate behavior as borrowing from the capital markets to pay dividends and to do stock buybacks while maintaining a cash hoard in foreign banks.
America’s multinational corporations are simply not investing in America. This is seen in the capital expenditure data, which peaked in August 2014 and are now down more than 11.2 percent from that peak. When corporations rely on stock buybacks or mergers and acquisitions to grow their revenues, as they do today, then the system as a whole stops growing, as evidenced by the anemia we see in the GDP data.
Government behavior is an issue
It’s not only the tax code but the behavior of the government that discourages investment. This year alone, the U.S. has killed seven major merger deals, including Bumble Bee and Chicken of the Sea, as if consumers had no substitutes for tuna. (The other six were GE/Electrolux, Halliburton/Baker Hughes (in an industry that badly needs consolidation), Comcast/Time Warner (another industry where change/innovation is making traditional business models obsolete), Sysco/U.S. Foods, Pfizer/Allergan, and Staples/Office Depot (where Amazon and Costco are taking market share.)) Who wants to deal with regulations and laws that could and do change without notice?
Abdication of fiscal policy as a tool
The uncertainty of the playing field is not the only issue discouraging growth and efficiency. Worldwide, there is a lack of the proper use of fiscal policy as a macroeconomic tool. The U.S. federal budget expands every year and is constantly in deficit. But the current and recent budgets have collected more in new taxes than they have given back in new spending – with the ratio in the current budget standing at 3 to 1 ($3 in new taxes for every $1 increase in budgeted spending). And most of the new spending appears to be money transfers as opposed to capital (infrastructure) spending. The U.S. debt has doubled in a few short years with little or nothing to show for it, except the prospect of much higher taxes when interest rates rise.
Most major Western governments, by abdicating the use of fiscal policy as a tool, have put the entire policy burden on the monetary authority, which is ill-equipped because the policy tools at their disposal are too blunt (interest rates and printing money) to have an impact where needed. In addition, the central banks are run by academics, who lack the qualifications, experience, and boldness to navigate through uncharted waters (the last bold central banker in the U.S. was Paul Volcker). Today’s Fed is overly concerned about what Wall Street’s short-term reaction to policy changes might be, and so they are like deer in the headlights when it comes to “normalizing” interest rates.
ZIRP is anti-growth
The Fed’s zero interest rate policy (ZIRP) makes little sense where the demographics are such that the members of the largest cohort with the most wealth are retiring or rapidly approaching retirement. This demographic has been disincented to consume because they are worried about making their nest eggs last their rest of their now-prospectively longer lives in a regime where any return, much less an adequate one, is difficult to achieve.
Conclusions
It now appears that markets are recognizing these issues – fiscal, tax, and monetary policies – are all anti-growth. You can see the market uncertainty through the rapid rise in the price of gold and the inability of the equity market, despite being viewed as the only yield game in town (via dividends), to rise above the peak set a year ago (S&P 500 at 2131 on 5/21/15). And, it is almost a sure bet that the anti-growth policies will be with us until well after the November elections.
Under these conditions, the equity market appears richly priced and unlikely to produce an adequate return over the foreseeable time horizon. The traditional alternative to equities, the fixed income markets, produce little or no return, and are subject to the policy whims of a few academics who don’t appear to have much of a clue as to why their policies are actually anti-growth.
Robert Barone (Ph.D., Economics, Georgetown University), an adviser representative of Concert Wealth Management, is a Principal of Universal Value Advisors (UVA), Reno, NV, a business entity. Advisory services are offered through Concert Wealth Management, a Registered Investment Advisor. All accounts welcomed. Robert is available to discuss client investment needs. Call him at (775) 284-7778.
Statistics and other information have been compiled from various sources. Universal Value Advisors believes the facts and information to be accurate and credible but makes no guarantee to the complete accuracy of this information. A more detailed description of Concert Wealth Management, its management and practices is contained in its “Firm Brochure” (Form ADV, Part 2A) which may be obtained by contacting UVA at: 9222 Prototype Dr., Reno, NV 89521. Ph: (775) 284-7778.
