Daniel Lacalle, economic adviser to the People’s Party (PP), recently spoke at a forum on the keys to investing, organized by El Español, where he presented his vision on the current and future macroeconomic outlook of global economies.
The current environment is characterized by the lackluster pace of economic growth, as a result of what Lacalle calls the «financial repression» that is substituting investment for debt and public spending. This situation leads to the «Japanization» of the economy, that is, recurring low growth and inflation with historically low interest rates, which creates a dynamic from which it is difficult to escape. A situation that caused, for example, the fall of the Nikkei index from around 40,000 points to 13,000 in just a few years.
Debt Saturation
According to Lacalle, this happens despite the fact that recession indicators have eased. This is because the current growth relies exclusively on the policies of central banks and governments, which focus their attention solely on increasing public spending and borrowing. debt saturation does not generate growth
In his opinion, this doesn’t address the substance of the matter, which is the fact that investment decisions and industrial production have fallen. Therefore,.
The figures prove this to be true. At present, the global money supply has reached its record level of 74 billion dollars. But this does not translate into growth. On the contrary, it is an excess of liquidity that causes low and unequal growth, since it doesn’t come from the investment of capital but from the recycling of capital. It is a non-efficient growth model.
«Financial repression» (continued expansionary monetary policies), despite the fact that it holds back debacles in the business cycle, perpetuates imbalances and increases debt. The strategy of injecting liquidity continuously triggers the value of the ultra-cyclical assets (more linked to the cycle), but once these injections expire, their collapse is inevitable. Therefore, it is not an effective strategy according to Lacalle.
Why such lackluster growth?
Lacalle explains that the current low level of growth is due to three factors:
- Impact of Technology: Contributes to the disappearance of inefficiency in price formulation, reduce inflationary pressure
- Aging of the population in developed countries: Slows consumption
- Overcapacity: Causes business profits to stagnate. Raw materials are not traded, and low rates and indebtedness perpetuate overcapacity. Therefore, investment decisions are reduced.
In his opinion, we should not fall into an «inflationary mirage,» that is, making decisions for fear of inflationary tendencies. Interest rates are not going to rise, which brings us closer to a Japanization scenario in Europe, but without the savings component that existed in Japan.
The fears of a recessionary environment and downward inflation have contributed to the fact that, at present, there are 11 trillion dollars of bonds with negative real returns in global capital markets. A huge sum, which makes it foreseeable that high returns will not be achieved for any kind of asset.
Where are there investment opportunities?
Therefore, the perception of risk is biased and that risk free assets are providing negative real returns, while central banks continue with their strategy of injecting liquidity. The last of them, the Federal Reserve, is changing its monetary policy towards quantitative expansion, promoting with it the increase of the global money supply.
In short, central banks and governments do not intend to change their policy of encouraging borrowing and not reducing the deficit. Can this policy be detrimental to investments? Lacalle believes that no, because there is no inflationary effect. What it does generate is an increase in overcapacity and more debt, making economies less dynamic, since fewer investment decisions are made.
In this scenario, Lacalle recommends that investors, if they want to identify investment opportunities in the current environment, should look for them in those sectors/companies that take advantage of the factors that contribute to dwindling growth: technology, aging population and overcapacity.
Javier Ferrer
Director of Financial Communication at Proa Comunicación