It is odd how a single event can cause some notable leopards to change their spots. In this case, the election of Donald Trump has caused reverberations throughout the financial world, and some apparent self-reflection by several of the world’s leading thinkers.
The investment landscape and headlines of today would be unrecognizable to someone who fell asleep six months ago and suddenly snapped awake. Financial markets have undergone a tectonic shift that few saw coming. Back in the summer of 2016, the prevailing belief was that central banks were all-powerful and would forever push rates lower in a continuation of policies followed since the crash of 2008. In a show of force, the Bank of England announced a fresh cut to their interest rate to fend off an economic seizure in the face of the Brexit decision, the European Central Bank re-upped quantitative easing, and the Fed was maintaining overnight rates at just above zero.
Evergreen initiated a slightly modified version of its annual forecast EVA just over a year ago. We shifted from specific predictions to attempting to identify developments that could catch the investment community off-guard. As we noted at the time, this was an unabashed imitation of what Blackstone’s Byron Wien has done for years (including when he was Chief US Investment Strategist for Morgan Stanley). However, we also did this because it is the most unanticipated events that have the greatest market impact.
A Tale of Two Halves: If we simply evaluate global market returns last year, one might conclude 2016 was a fairly uneventful. Global stocks and bonds finished up 8%, and 4% respectively, which is generally what you’d expect in a typical year. However, if we dive a bit deeper “uneventful” wouldn’t be an appropriate description.
Legend has it that Richard Nixon once said: “We’re all Keynesians now.” In reality—and most ironically—those words were actually uttered years earlier by the ultimate anti-Keynesian economist, Milton Friedman. However, former President Nixon did riff off of this when he declared, after removing the US from the gold standard in 1971, “I’m now a Keynesian in economics.” Unsurprisingly, this turned out to be bad news for the American public as Mr. Nixon’s conversion unleashed a decade of stagnation and inflation. As a result, this wrenching experience produced a new term that the disciples of Keynes had previously believed was impossible: stagflation.