A Social Economic & Ecolological Paradigm

FPM principals have been expecting a rise in interest rates for some time since 2011: with hindsight of time-told evidence and our longstanding10-year deleveraging economy paradigm (as foretold by economists Reinhart and Rogoff), FPM revise its forecast to a low-rate global environment into the medium future. The reader will understand that this is a bold revision at a time when financial services are not only vying for higher rates but indeed anticipated from Federal Reserve between 4Q14 and 1Q15. Remember that the economic recovery in terms of positive GDP growth started in 2Q09, therefore now beyond the halfway stage of the mooted 10-year economic stagnation paradigm, FPM would not be surprised to see no more than an overall 25 bps hike between 4Q14-1Q15. 

Make no mistake, any small rate-hike would not be a signal for policy shift in interest rates. Rather yet another in a long line of smoke-and-mirror tricks to timely bolster waning economic confidence. A show of stable economic growth would be the intended effect. That greatly acknowledged behavioural science characteristic of market participants called "confidence" is at junctures seemingly crucial to a world of rational investment decision makers! The recent Wall Street Journal op-ed promoted this as "private animal spirits" - more criticism of this stale brand newspaper in our next YAALA series.

Based on traditional economic understanding FPM forecast in earlier blogs that a first interest rate hike would happen by 1Q14 this year - Doh! In fact in Europe earlier this month the central bank there imposed unprecedented negative interest rate policy on banks depositing money at the European Central Bank, citing flagging economic recovery. It is the same situation in the United States of America, as reflected in mentioned WSJ article trumpeting for policy shift:

“The Federal Reserve's Open Market Committee on Wednesday stuck to its path of reducing its bond purchases by $10 billion a month… [it also] Fed slashed its growth prediction to 2.2% for 2014, which is down sharply from the nearly 3% forecast that it made in March… The move reflects the minus-1% growth in the first quarter, which could turn out to be even worse with revisions… Predicting future growth is notoriously hard, but this is the fifth consecutive year that the Fed has been too optimistic…” WSJ June 19, 2014

 FPM perceives developed countries’ economic weakness as structural and cyclical in the long-term. The developed countries being at structural saturation levels in terms of economic activity will not necessarily be expected be characterized by excess spending-power, which would certainly contribute to inflation increases. Yet unofficial economic growth policies of these anaemic growth economies are through population expansion via immigration which is helping to minutely tick-up GDP growth, lest the statistics reflect the real structural economic downturn. We validate this unpopular growth policy through the discontented nationalist voting patterns in the recent European Union elections. Using a corporate finance comparison, the population expansion economic policy could be said to be growth through acquisition rather than organic expansion. In the UK, the Office of National Statistics, confirmed a population of "64.1m in mid-2013 – up 400,600 on mid-2012". This is not a Y-O-Y rise in new births (from "Bonking Britain"!) or newly registered population but net inward migration.  Below are some 'stats' for the number-crunchers about  US jobs growth versus population:

Increasing Population and Real Unemployment (Source: EPI.ORG)

The proponents of interest rate rise suggest that a benign policy environment induces more borrowing and creating asset bubbles. Indeed only those afflicted with foolhardy short-termism imprudence would lead to detrimental debt addiction. A rational approach to bearing debt is also logical.  Debt accumulation is a choice prudently assessed on the ability to service one's debt i.e. pay the interest and coupons on expectations based on interest rates. Therefore, in a world of job insecurity and excess spare capacity of long-term skilled unemployed workers, the low-rates are helping debt-ridden suicide jumpers away from the precipice! That debt-indulgence is an insidious and malign threat to an entity’s well being only tells half the story. Indeed, have we forgotten or are we distracted and detracted from the debt crisis of many developed countries. Remember the US “fiscal cliff” wrangle over raising the debt ceiling (as related aside, the war in Iraq alone has cost taxpayers US$ 4 trillion), European Union debt crisis, and the downgrading of national credit ratings (including US and UK losing its top triple-A ratings). We believe these were real and impending threats in an already feeble pretentious global economic recovery - we don't know from certitude of analysis that these were not PR-contrived media diversions.

1) FPM regard moderately rising actual inflation as necessary and good in context; despite that age-old phenomenon being manipulatively managed down in the recent decade at 2%-5% levels in most developed and to a lesser extent in developing economies. Inflation is necessary at least as a sign that economy is over-heating i.e. too much money chasing too fewer good in context of increasing economic growth. Yet the reality is that the 'real money' is not chasing those goods and service. Instead printed money or credit expansion by multiple governments towards propping-up the global credit markets is misallocating taxpayer resources, ever since the Great Recession of 2007-08, and also well before from pump-and-prime stimulus policies. Inflation also indicates firms have growth expectations through pricing power – which would suggest future corporate health. Corporate war-chest spending on share-buybacks is indicative of low potential economic growth, and done for stimulating share-price performance and enhancing the wealth effect. Whereas the obfuscated reality is that input-factor costs and raw materials are being driven-up through commodity and other asset speculation stemming from unprecedented massive credit expansion; or the now tapered “Quantitative Easing” programmes. These higher input-costs are passed to consumers in clandestine ways that does not show up in measurement of actual inflation levels. So without letting the cat out of the bag i.e. inflationary worries, interest rate rise is not a threat. Economic fundamentals still appear weighted towards deflation tendencies so is a rate increase is not possible in that context. Introducing the next reason why interest rates won't rise rapidly is that actual and expected inflation diminishes the value of debt i.e. debt destruction.

2) With North American aggregate debt alone estimated at some US$ 60 trillion, any fast or sharp rise will utterly destabilise governments, corporations and individual debtors, sinking the economies into further cycle of recessions and recoveries; a cycle which when reflected upon over time we like to describe as a "new equilibrium restorative pause" (at least in the non-BRICS countries). Rapid economic growth is not good for economies - doing things right takes time! Sustainable future requires long-term planning NOT mammon-orientated short-termism: 'make a buck out of whatever good and hell breaks out'. FPM aim to reinforce that by hijacking a logo from the Climate Revolution activists "What's Good For The Planet Is Good For The Economy".

Source: Vivienne Westwood Ltd, FPM

While investment strategists are tuned to economic fundamentals like strong employment and rising inflation to connect the timing and actuality of eventual interest rate rises, FPM thinking holistically  believe there are socio-economic ecological political factors that maybe underpinning a low rate environment for many years to come. The much needed multi-billion dollar reallocation of capital towards lowering fossil-fuel dependency requires long-term massive global investments at lower costs of financing. More below.

3) US Government policy of tapering or turning-off its monetary stimulus is not the same as the US Fed or other central banks being ready to raise interest rates. In fact the ideas are at opposite ends by degrees! The occasional lip service and rhetoric of talking-up the possibility of climbing interest rates is not a real threat for the over-riding reasons economic fundamentals given in point 1 and 2 above. FPM’s interpretation for the Federal Reserves’ neutral stance on interest rates is not only that economic fundamentals warrant it, but also politically speaking that there would be back-lash short of a people’s revolution if the political classes again seemed to be helping unscrupulous banks and other sizeable asset owners. Simply put, banks are in the business of lending money / capital and creating wealth. Yet if returns on lending / investment activities are low i.e. small interest receipts and other capital asset returns, then banking activities are not as profitable. This somewhat appeases and satisfies the struggling masses of the ‘ragged trousered philanthropists’ i.e. you and me. Witness the estimated 50,000 people protesting against austerity cuts in London UK on Saturday 21^st June.

Another political impetus for a low growth economic environment despite forecasts and sugar-coated propaganda, stems from global climate concerns. For real! There is finally a real recognition that global climate change induced by man’s activity is a real threat to the sustainability of planet Earth. On the basis of resulting increase in air travel, carbon emission and 'carbon footprint' concerns, FPM's does NOT support the clandestine government policies of population expansion by immigration. The exigency of proactive action is now! If the biggest markets for man’s productivity and economic activity can be stalled then carbon dioxide CO² emission is also reduced. Without delving too deeply into the science of climate change, we are on the cliff’s edge towards increasing the average global temperature and setting of a sequence of ecological consequences with disastrous effects for humanity. We recommend web-searching Bill McKibben or simply go to website 350.org where he explains the urgent maths of climate change. FPM’s projects in funds and investments is oversight of emerging trends and assessing their value. And indeed we see global warming and solutions as a game changer with great enterprise value. Don’t take our word for it visit Risky Business.