Tenth birthday edition | Deloitte UK has been saved
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The Monday Briefing reached its tenth birthday over the summer. This week’s Briefing offers some thoughts on the lessons we’ve learned and the errors and successes we’ve made along the way.
Perhaps the most obvious lesson is that the economy depends on a stable financial system. In getting this right before the crisis, and emphasising it in the Briefing, I can’t claim great prescience. The devastating effect of the bursting of Japan’s banking and asset bubble in the early 1990s provided me, and others of my generation, with a graphic illustration of the effects of a financial collapse.
Following the failure of Lehman Brothers in 2008 it became clear that a very nasty recession was on the cards. The question was whether the world could avoid a 1930s-style depression. The briefing took issue with those who argued that the global economy would drop off a cliff. As we wrote in March 2009, “at an extreme, Quantitative Easing should work. A central bank could pay any price and buy all assets in the economy. It could shower consumers with helicopter drops of cash. At some point a rising tide of money and liquidity would kick start growth”.
This simple logic made us think that, bad though the recession of 2008-09 was, it wouldn’t turn into a depression. For the same reason we did not think the euro crisis would morph into an unstoppable depressionary spiral.
We were right on those two counts, but wrong on plenty of others. In the last ten years I’ve re-learned the impossibility of predicting movements in asset prices. Apparently over-valued assets go on getting more overvalued. Cheap assets get cheaper.
Bonds are a great example. In 2010, I felt that bond yields, or interest rates, having fallen sharply, were unsustainably low. I wrote, “the fundamentals do not look good for government bonds even in the US and UK. They are issuing debt on a vast scale. Inflation and growth expectations are rising, a negative for bonds which give a fixed return”. That was all true. What we did not anticipate was the choppiness of the recovery or just how long low interest rates would last. As a result bond yields, far from rising, have fallen, and their value has soared.
We were too bearish too early on gold. Its price rose four fold in the ten years to 2009. In that year we concluded that the three main drivers of gold were the weak dollar, demand as a hedge against inflation and emerging market demand for jewellery. The briefing ended with “as for the future direction of the gold price we haven’t a clue… these three forces could keep pushing gold up for a long time to come. That said, gold today seems about as fashionable an investment as tech stocks were in 1999 or US housing was in 2006 – a slightly sobering thought”. In fact the gold price rose for a further 2 years.
One of the surprises of the West’s recovery is that wage growth has remained muted despite falling unemployment. The normal relationship between the supply of, and demand for, labour, seems to have broken down. The briefing got that wrong. At the start of this year, with UK unemployment heading to a 40-year low, we thought wage growth would accelerate. Instead it has flat lined. I take comfort from being in the company of most economists with that error.
One thing that has stuck in my mind from the last ten years is the frequent divergence between the mood about the economy, often represented in newspaper headlines or equity indices, and the economic fundamentals. The mood oscillates, often wildly, fundamentals change slowly.
18 months ago the mood about the global economy was gloomy with a focus on Brexit, the US elections, a possible Chinese crash and the rise of right wing parties in Europe. That nervous zeitgeist was not a good guide to subsequent events. In the last year and a half the global recovery has gathered pace and financial markets have boomed. If predicting growth was the aim it would have been better to focus on the fundamentals last spring, above all cheap money, and pay less attention to the news.
In forming views we often place too much weight on the latest information, particularly when illustrated by graphic examples. These mistakes are sufficiently well documented to have names. Behavioural economists call the tendency to form views based on the latest news the recency bias. The availability heuristic describes the way in which we attach greater weight to something which can be readily recalled.
Less easily recalled information, in this case economic basics – such as the degree of monetary stimulus or where we are in the economic cycle – too often get neglected.
One antidote to short termism is an understanding of economic history. For all the talk in recent years of the ‘unprecedented’ or ‘unique’ nature of events much of what has happened is eerily familiar. History sheds light on most of today’s big economic arguments, from the debate about globalisation, to the size of the state to the benefits and risks of loose monetary policy.
When I started the Monday Briefing in the summer of 2007 the focus was on how rising asset prices and debt levels were creating new risks. It was a classic case of low interest rates driving a search for yield and, in turn, financial excess.
Central banks responded to the crisis by printing money and collapsing interest rates. At the time, in early 2009, we wrote in the briefing, “The greater risks lie further ahead once Quantitative Easing has achieved its original goal and the economy is growing. The risk is that QE ends up overshooting, pushing up inflation and asset prices higher sowing the seeds of the next bubble”.
Eight years on we seem to be moving into this stage of the cycle, with decent global growth, heady asset prices and rising debt levels. The challenge for central banks, and we are in the realms of experimental policy here, is to reduce monetary stimulus without crashing asset markets or economies.
This scorecard of successes and failures is subjective, somewhat akin to marking our own homework.
PS - Many of you, around 1,200 readers, kindly contributed to our survey of Monday Briefing users over the summer. Feedback was generally positive. Using a TripAdvisor or Amazon style rating system, the overall rating was 4.7 stars out of 5. If the briefing were a London restaurant we’d be on the same level as Gordon Ramsay’s Petrus in Knightsbridge. Three quarters of subscribers read the Briefing every week, giving a weekly readership of around 25,000. Most of you read the Briefing on a laptop or desktop, not a mobile. The average subscriber is aged 39 and has been with us for 3 years. The favourite news sources for our readers are the BBC (84% of readers use it), the Financial Times (55%), the Economist (44%) and the Guardian (34%). Many thanks for your comments, ideas and feedback. The team has read them all, we’ve discussed them in detail and we plan to act on many of them.
Ian Stewart is a Partner and Chief Economist at Deloitte where he advises Boards and companies on macroeconomics. Ian devised the Deloitte Survey of Chief Financial Officers and writes a popular weekly economics blog, the Monday Briefing. His previous roles include Chief Economist for Europe at Merrill Lynch, Head of Economics in the Conservative Research Department and Special Adviser to the Secretary of State for Work and Pensions. Ian was educated at the London School of Economics.