Weekly Digest: "You're fired! Or not..."

I’m an assiduous reader, but there are only so many hours in a day and not enough of them to consume everything that comes my way. I have to resort to making various reading piles, both real and virtual.

Luckily, I only subscribe to one physical newspaper, the Financial Times. Much as I like the online edition and the app, I always find interesting stories or opinions in the print version that I would have missed online. This all adds up to quite a lot of newsprint. But you don’t have to worry about me turning into an old man surrounded by teetering barricades of newsprint. Mrs. W-E has a black belt in Marie Kondo-style domestic order and there are occasional purges!

In my recent catch-up reading, I came across an FT article by Simon Kuper extolling the virtues of the Annales d’Histoire Economique et Sociale. It’s a famous French journal that eschews the daily noise in favour of the long sweep of lasting forces.

The journal’s founders suggested that history operates on three levels of time: geographical, social and individual. The first has the longest cycle as it relates to changes in the planet and nature; the second refers to factors such as demographics and culture; individual time has the shortest cycle. Not only is it limited to a human lifespan; people also tend to think more about the here and now rather than the experience of many years, when making decisions. This behavioural bias of thinking only about issues that readily spring to mind – often recent – is known as the ‘availability heuristic’. 

The French historians concluded, with some justification, that we should spend more time focusing on the long cycles, but that human nature tends to lead us to focus on the short-term stuff, which might offer quick fixes but often fails to address the underlying malaise. Does this sound worryingly familiar when we put it into the context of politics or investing? (If you’d like to read more about how insights from behavioural science are helping us refine our investment process, click here to read our latest Investment Insights.)

DIVERSIONARY TACTICS

The king of the short news cycle is President Trump. Mr Kuper even suggests that he’s operating on his own fourth level of time: the daily news cycle. It certainly feels that way. The reasons behind it are in the realms of speculation. There’s little doubt that he has a very short attention span; this makes him jump from one topic to another with alacrity. He’s also prone to influence by the most recent opinion he’s heard. Then there are what one might describe as ‘diversionary tactics’, where he churns out social media comments and press releases with the deliberate intention of deflecting attention from news that reflects badly on him. In a similar vein, he can rattle things off purely with the intent to destabilise or confuse his opponents – or even his supposed allies! 

One of the recent cycles of daily noise concerned the fate of Jerome Powell, the Chair of the Federal Reserve (Fed), the US central bank. His term as Chair ends in May, but the President is constantly haranguing him to cut interest rates with a view to reducing the interest burden of the US government. This a burden that, I might add, has just been increased by the recently passed, deficit-expanding One Big Beautiful Bill Act. Trump also keeps threatening to fire Mr Powell. The latest leak to that effect came last Wednesday but was quickly denied after a brief, but noticeable, sell-off of US equities, bonds and the dollar – the same nasty cocktail that greeted the ‘liberation day’ tariff announcements. 

In the short term, this episode illustrates that the White House is willing to keep sending test missiles into the market to gauge opinion on certain matters. The market reaction on this occasion was negative, forcing the disavowal of his comments. This all adds to the background volatility, but for now, the impact is relatively limited. 

HEADING TOWARDS FISCAL DOMINANCE

More pertinent to the long term, though, is the fact that the President is paying so much attention to interest rates. In the West, we’ve recently lived through several decades when monetary policy was the dominant force. Interest rates were used both to damp down the economy when required and to boost it. Following the bailouts to alleviate the financial crisis and then the pandemic spending, fiscal interventions have become more prevalent, in the form of cheques. Populist forces are reinforcing that trend.

The debt and interest rate burden is now becoming onerous enough to make politicians wish for greater influence over monetary policy. This is the economic condition known as ‘fiscal dominance’. I predict we’re going to hear that phrase a lot more, because debt burdens are unlikely to fall in the absence of some sort of productivity growth miracle (which is the great hope for AI).

Investors are understandably nervous about politicians wresting greater control of monetary policy from central bankers. Economic historians and Fed governors are still haunted by the ghost of Arthur Burns, the Fed chair in the 1970s who was at least partially responsible for that era’s high inflation owing to his subservience to President Nixon, who demanded lower interest rates. 

When we approach portfolio construction, we’re acutely conscious that government debts are both rising globally and much less affordable now that interest rates are higher. The US is far from alone, with the UK, Japan and several European countries in the same predicament. We could be on the edge of a slippery slope. That’s one reason why, in portfolios that include bonds, we’re only investing in government bonds with shorter maturities. They might benefit from lower rates if central banks are persuaded to cut rates sooner, faster and further, but will be less at risk from increased inflation if monetary policy is inappropriately loose. 
 

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