Unless you have credibility, no one will believe you. A number of major actions were announced recently by financial authorities in Switzerland and China to maintain or regain credibility.
The Swiss Central Bank announced last week that "enough was enough" and stopped buying euros and other currencies to support the Swiss Franc within its previously announced currency band pegging it at 1.20 euros. After buying billions of euros, the Swiss Central Bank had expanded its balance sheet over 4 times its size in a year!
The Swiss National Bank clearly got concerned with maintaining its credibility in the world and with its citizens. It worried that expanding its balance sheet much further was just too much to do. Yes, the Swiss voted down recently returning to the gold standard but don't let that fool you as the Swiss want a conservative monetary policy and a strong franc. The Swiss take a longer term view on building credibility in the world. Bravo!
Then, over the weekend, Chinese authorities lifted margin requirements, further reducing leverage and financial risk in their markets. It is clear that the Chinese government has entered a new era correcting poor policies of the past where leverage and speculation were rampant, which led to false beliefs of underlying growth. The government has been letting the air out of bubbles that were formed over the last 10 years, hoping to build a strong foundation for sustainable above-average growth, with moderate inflation in the future. Recent economic statistics are encouraging, with strengthening exports and a slower decline in housing prices. Positive change is building credibility.
It is clear, unfortunately, that the Democratic-controlled administration and Republican-controlled Congress have different agendas and unless there is some movement into the middle, little will be changed. It appears difficult to reach agreements on a range of areas from immigration, to tax policies, to trade policies, to energy policies and finally to the budget.
How can businesses and families plan for the future without more certainty out of Washington? No winners here. And certainly no credibility with the public and the world. Just look at the polls.
President Obama's State of the Union address did nothing to change that. Basically, it's politics and a standoff, without anyone succeeding. Unfortunately, in Washington, it's all about the presidential election in 2016.
I am tired, quite frankly, of hearing that further monetary easing is the answer. We need pro-growth policies in the world to create jobs and raise incomes so there is money to spend by individuals and companies. Cutting costs and cutting deficits is NOT the answer. There is little credibility in governments to institute stimulative policies as they remain overly focused on deficits, limiting financial institutions to lend while increasing regulatory hurdles to stymie growth. Declare VICTORY on the excesses of the past and promote policies for growth. The United States reported the smallest deficit in 7 years, Germany reported a balanced budget and deficits around the world are declining too. Yes, we need fiscal and monetary discipline but it is time to focus on the need to grow. There is no inflation on the horizon. If not now, when?
There are few changes in our global perspective for 2015 and 2016. We are focused on the consumer and will watch to see the benefits of the decline in energy on disposable incomes and spending. Secondly, we will watch to see changes in government policies here and abroad to promote growth. Overseas we expect more monetary easing but feel that it will benefit financial assets more immediately than hard assets.
We continue to feel that the Federal Reserve will be influenced by lower inflation here and abroad and maintain its easy policies longer than assumed. But, if wrong, will that be perceived negatively? Maybe at the outset, but really it represents their statement that all is well. I still believe that the expansion goes longer in the states at a lower trajectory than is consensus; inflation will remain lower than 2 percent through 2016 but will bottom sometime in the middle of this year at 1 percent; corporate earnings will increase as will cash flow, but at a slightly lower rate than earlier estimated due to the drag from the energy sector; the yield curve will flatten out with 10-year bonds remaining below 2.5 percent; commodity prices will bottom mid-year at lower levels; the dollar will remain strong; China and India will do better as we move through the year but Europe and Japan will remain disappointing. And finally, corporations will accelerate change in order to prosper and provide good returns for their shareholders.
Keep your eyes open as a lot is happening throughout the world; change is in the air and credibility is on the line everywhere from governments to monetary authorities to companies and to people.
Commentary by Bill Ehrman, founder of Paix et Prospérité Funds (www.prosperitefund.com). Bill was co-CIO with Byron Wien at Century Capital Associates, CIO and partner at George Soros' Quantum Fund, and CIO and managing partner at EGS Partners.