Daniel Lacalle, economic advisor to the Popular Party, recently spoke at a forum on Investment Keys organised by El Español, where he gave his views on the present and future macroeconomic scenario in global economies.
The current scenario is characterised by the poor pace of economic growth, as a consequence of what Lacalle calls "financial repression", which replaces investment with indebtedness and public spending. This scenario provokes the "Japanisation" of the economy, that is to say, the "Japanisation" of the economy, recurrently low growth and inflation with historically low interest rateswhich create a dynamic from which it is difficult to escape. A scenario that caused, for example, the Nikkei index to fall from around 40,000 points to 13,000 in a few years.
Debt saturation
According to Lacalle, this is despite the fact that the recession indicators have moderated. Because current growth relies exclusively on the policies of central banks and governments, which focus solely on increasing public spending and borrowing.
In his view, this does not address the bottom line, which is the fact that investment decisions and industrial production have fallen. Therefore, debt saturation does not generate growth.
The figures bear this out. The global money supply has now reached its record level of 74 trillion dollars. But this is not conducive to growth. On the contrary, it is an excess of liquidity that leads to low and uneven growth, because it does not come from capital investment but from the recycling of capital. It is an inefficient growth model.
Financial repression" (continued expansionary monetary policies), while curbing downturns in the business cycle, perpetuates imbalances and increases debt. The strategy of continuously injecting liquidity boosts the value of ultra-cyclical assets (more linked to the cycle), but when these injections are cancelled, they collapse.. It is therefore not an effective strategy according to Lacalle.
Why is growth so poor?
Lacalle explains that the current low level of growth is due to three factors:
- Impact of technologyIt contributes to the elimination of inefficiencies in price formation. It reduces inflationary pressure.
- Ageing population in developed countries: It reduces consumption.
- Overcapacity: It causes corporate profits not to rise. Commodities do not trade, and low rates and debt perpetuate overcapacity. Investment decisions are therefore reduced.
In his view, we should not fall into an "inflationary mirage", i.e. take decisions out of fear of inflationary pressures. Interest rates will not riseThis brings us closer to a scenario of Japanisation in Europe, but it also brings us closer to a scenario of without the savings component that existed in Japan..
Fears of a downward growth and inflation scenario mean that there are currently $11 trillion of bonds in global capital markets with negative real yields. A huge sum, which means that high yields are not expected to be achieved for any asset class.
Where are there investment opportunities?
Therefore, as risk perception is skewed, and risk-free assets bring negative real returns, while central banks continue with their strategy of liquidity injections. The latest of these, the Federal Reserve, is shifting its monetary policy towards quantitative easing, thereby pushing up the overall money supply.
In short, central banks and governments do not plan to change their policy of increasing borrowing and not reducing deficitsCan this policy be detrimental to investment? Lacalle thinks not, because there is no inflationary effect. What it does generate is an increase in overcapacity and more debtThis makes economies less dynamic, as fewer investment decisions are made.
In this scenario, Lacalle recommends investors to look for investment opportunities in sectors/companies that take advantage of the factors that contribute to slowing growth: technology, ageing population and overcapacity, if they want to identify investment opportunities in the current context.
Javier Ferrer
Director of the Financial Communication Department of Proa Comunicación