• James Twidale


I think that we are all prone to wish that money grew on trees. It would be fairly convenient to simply go and pluck one hundred Rand notes of your little money bush. If only it were that easy. As we grow into adults most realise that coming about money is not as easy as one would imagine and requires a certain amount of blood, sweat and tears. Our money is hard earned and easily spent.

The world today, with special reference to developed markets, is undergoing a radical economic and monetary policy experiment. This experiment is almost 8 years old and is not even approaching conclusion. Post the 2008 financial crisis central banks across the world have been pulling on every lever at their disposal in order to return the global economy to some semblance of normality. The levers they have used have become more creative but less tested as they run out of ideas and ammunition.

We currently find ourselves on the verge of a global economy that is in stagnation. There is low growth, very little inflation with deflation in certain countries, and central banks have exhausted nearly all the tools at their disposal for economic stimulation. To think that we have negative interest rates in Europe and Japan is literally frightening. Essentially you have to pay your bank to keep your money, not the other way around. This is certainly unchartered territory even for the most open minded economists and politicians.

The reason we are seeing such measures being taken is central banks have been trying to stimulate economic growth and demand. These two items are good for all parties in an economy from capital providers to labour. The problem was post 2008, people were too scared to start businesses, invest or consume and simply stopped doing just that. Central Banks began printing money to stimulate demand, investment and economic growth. They did this by giving banks money and stronger balance sheets to go about their business. A good first step, however, the unknown factor was that people would not actually demand any of this new lending capacity. We have a demand problem, not a supply problem.

I also don’t think that, globally, banks wanted to lend as freely as before and tightened up lending criteria so much, as a result of the losses in 2008. This meant the intended money for circulation never in fact got out of the banks in the first place, if it did, it went to the most creditworthy customers who tended to be financially strong enough in any case, which is a little self-defeating.

The unintended result has been that the “rich” continued to get richer, as they at least had the ability to invest post the crisis. This while the “poor” have been severely constrained by a very weak global economy with little to no access to the stimulatory benefits of the central banks to date. The intentions of the central banks were great but the execution seems to have been poor. We are now at the point where all the monetary policy experiments are reaching their conceivable end, yet the global economy is in no condition to be self-sufficient.

One new concept that is beginning to gain traction amongst economists, is the concept of “helicopter money”. This is where instead of giving banks more money to lend and hoping that they are willing and able to in fact lend it on the central banks and governments of the developed world would literally find a way to put cash in the hands of every person. The simplistic ideal is that if you can increase the perceived wealth of every individual (the “wealth effect”) they will be more willing to spend that money. This expenditure has a multiplier effect on that particular economy which hopefully becomes a self-fulfilling prophecy. In other words, it aims to achieve what Quantitative Easing wanted to achieve but was never quite able to.

If a bag of money were dropped at your feet once a month, over and above what were currently making, you are more likely to spend more and demand more which is hopefully enough to kick-start the global growth machine once more and eventually allow central banks to stop yanking on the abnormal levers they have had to create.

The intention is to break the back of the demand problem we have in this world. It’s interesting that we find ourselves here. Without inflation concerns investors and consumers have no incentive to invest or consume. The demand for the money reserves that the banks have, becomes negligible.

If you want to buy a house but don’t think that the price will rise over the next 12 months, there is no incentive today for you to go and borrow money and purchase that asset today. You could simply go and do the same thing in 12 months’ time after hopefully having saved more money in the interim to assist with the purchase. This is compounded if you also do not expect borrowing costs to increase. This is certainly not the case locally, however we are looking at a far larger more substantial global problem that will lead to economic issues here as well in time.

If you don’t expect that more people will be buying your product this year as opposed to last year, why would you go and invest in a new machine to increase capacity? Why would you even upgrade your existing machine if you can run your current machine a little harder and defer the expense? You wouldn’t and this is why capital expenditure of physical plant, property and equipment over the past 8 years is at all-time lows and decreasing in the US and Europe.

The problem is not the so called supply at the top end but rather the demand at the bottom end of the economy.

While the theory of helicopter money actually may yield the same results it does one thing slightly differently: it puts capital in the hands of the majority that have not had access to the “free” capital that has been provided through QE. The hope is that the middle and lower echelons of the economic hierarchy are actually more likely to spend their endowment of new money which in turn results in the creation of demand. This will hopefully filter upward through the velocity of money.

The intended outcome is essentially the world spending its way back to prosperity through the redistribution of wealth which would kick-start demand and hopefully inflation. There is only so much money you can give away before people are in fact incentivized to spend it. What that number is, I do not know.

What we do know is that supply as it stands does not seem to be the problem but demand is. So will the supply of more money into the system create any waves? The outcome is truly unknown. I just think that the psychological effect of being given access to money you would not normally have had access to should stimulate some sort of expenditure and demand.

Local Market

Local Markets closed the week stronger with the ALSI closing 3.14% higher. The Top 40 and Financial indexes added to the gains, closing the week 3.34% and 2.78% higher respectively. This was supported by investors being less cautious about China’s growth prospects, as well as surprisingly good SA retail sales data.Industrials posted a gain of 1.7% to close the week in the green. Resources staged a significant resurgence, rising 9.85% for the week. The performance of resources should be received with caution as investors are aware of the capricious nature of commodities. That said they are 20.72% up YTD on the back of a weaker USD in the past few weeks and improved investor demand for gold. The recent improvement in emerging market sentiment has also boosted major commodity producing nations as demand for their goods has improved albeit of a very low base.

Global Market

The FTSE closed the week 2.25% higher. The DAX and Eurostoxx posted gains of 4.46% and 4.89% also benefitting from the positive Chinese data. UK’s major bourse closed the week above the 6,300 level, its highest for 2016. Pundits warn that these gains might fall back in the coming weeks. The Brexit uncertainty is likely to make the Pound volatile and weak which may impact the FTSE going forward until there is more clarity.The US market closed the week 1.62% higher. The Nasdaq and Dow Jones added 1.8% and 2.19% to end the week in positive territory. Inflation data came in lower than expected, however corporate earnings helped limit any declines amid growing uncertainty surrounding the US economic and policy outlooks. The Fed remains dovish going into the end of April which means that monetary policy is likely to remain accommodative for now. Asian markets closed the week in the green. The Nikkei closed 6.49% higher and Hang Seng up 4.64%. China grew at its slowest rate in seven years with GDP growth at 6.7%. Much of the gains this week can be attributed to the unexpected surge in the Japanese Yen against the US Dollar.

Economic News

The Rand closed 2.87% stronger against the US Dollar and 3.12% stronger against the Euro. It also posted gains against the British Pound, benefiting from the renewed appetite in emerging markets. Gold closed the week 0.35% lower as investors were seeking riskier assets combined with a weaker USD. Gold remains 20.56% higher YTD. Oil closed the week 3.06% higher on anticipation of major oil producers agreeing on freezing the production levels this past Sunday. The Doha meeting saw no such agreement, this may result in the oil price dropping back down below $40, however this remains to be seen. Many economists however still see oil as the biggest potential variable in global inflation for 2016 when calls for $50 a barrel by year end becoming a consensus. Despite rising interest rates and low consumer confidence, SA retail sales grew by 4.1% year-on-year in February 2016. The IMF revised down its global growth outlooks for both 2016 and 2017 once again, with the key exemption being China which was revised upward despite the recent trends. This was widely expected and did not put a damper on investor sentiment as global markets staged a positive end to the week.

Recent Posts