The images of the treatments anti-aging of the first decades of the twentieth century in the centers of John Harvey Kellogg, Helena Rubinstein, Max Factor or Elizabeth Arden are disarming. In hindsight we know that almost all of the costly tortures one underwent to keep oneself young and beautiful were perfectly useless if not harmful.
Such are also, probably, most of the treatments of life extension of today, starting from supplements that lead to hypervitaminosis and ending with hormonal therapies that make tissues young and lively again but which on the other hand accelerate cell mutations and increase oncological risks.
And yet, if we didn't proceed by trial and error and if there weren't an inexhaustible source of sellers and buyers of illusions who offer themselves as guinea pigs, there wouldn't even be progress, because out of a thousand attempts one finally works, it enriches the heritage of our knowledge and improves our lives.
Something similar happens to the business cycles. If we look at the history of attempts to stabilize or prolong their life we see a series of errors and horrors. The most famous one is the one committed by Federal Reserve in the early thirties, when at a certain point, in full depression, it was thought well to raise rates to bring back depositors who had withdrawn their money from banks. The money didn't come back and many debtors who had managed to survive thanks to the low rates went up in the air. And mistakes of the opposite sign were made in the XNUMXs, when it was thought that a little more inflation, which will never be, would have brought a lot of growth and a lot of more jobs. The result, stagflation, was disastrous.
And therefore, with each cycle, we start all over again, with new attempts and, inevitably, new mistakes. And as well as in'anti-ageing, waiting for good news from genetics and biotechnology, the good minimalist advice remains to walk the stairs and never miss blueberries for breakfast, in the theory of economic cycles the manual does not suggest much more than having an expansionary monetary and fiscal policy in the first part of the expansion and to become gradually tightening in the second half so as to prevent or mitigate overheating and inflation. And to be pro-business (less rules, less taxes) in the first part of the cycle and anti-business, if you really want it, only in the second. Nothing more.
In this cycle, which turns nine next month, we've managed to break even the Minimalist tips manual and embark on a great new experiment.
Only monetary policy, in fact, followed the manual. It was very expansive in the first part of the cycle and is now starting to be less so. In recent years, in fact, rates have gone below zero and the monetary base has increased fivefold. Now instead rates are rising and the monetary base is starting to contract, at least in America, where the liquidity that will be drained this year will be equal to two thirds of that introduced with the first Quantitative Easing. Not a little.
The manual was instead left to make dust as regards everything else. Fiscal policy was indeed expansionary in the first months following the end of the Great Recession of 2008 but then, frightened by the explosion of public deficits and debts, we all became restrictive. Not only Europe, with the wretched austerity policy at the worst moment imaginable, but also Obama's America, fiscally rather virtuous.
And as one was virtuous when one had to be prodigal, so today there is the risk of being prodigal, by lowering taxes, when one should be virtuous. But we will come back to this later.
The other point of daring experimentation regards business policies. We were anti-business early in the cycle when it was supposed to be pro-business, and we're all pro-business today. And so, following impulses more justicialist than rational, in recent years we have all introduced millions of pages of restrictive rules for banks and businesses and we have imposed huge fines on banks, reducing their ability and desire to disburse credit. Today, Expansion in full force and businesses swimming in profits, we deregulate and no longer harm anyone.
But is it really so? Have we become procyclical again, unlearning what little we learned in a century or more of booms and busts?
It's not for sure. In the'anti-aging it is legitimate and useful to distinguish between healthy structural choices (staying slim, moving, avoiding oxidants and having plenty of anti-oxidants) which increase life potential, as an economist would say, on the supply side, and questionable therapies, such as hormonal ones , which increase the potential on the side of energy expenditure, i.e. demand. The former are healthy, the latter lead to overheating and are risky.
Il tax cuts and the deregulation of the Trump administration (along with Japanese Abenomics and pale European attempts at imitation) are hormones that only lead to overheating if they are temporary and extemporaneous measures, perhaps destined to be reversed at the next political change (and heaven forbid that this coincides with a recession, otherwise we become even more pro-cyclical and never get out of it).
Instead, tax cuts and deregulation are as healthy and structural measures as blueberries if they become permanent. Sure, it would have been better to introduce them early in a business cycle but it's better late than never.
Unfortunately we cannot know if the acceleration of the ongoing global expansion is driven by blueberries or hormones. The American tax reform, to comply with certain budgetary rules, will gradually decay over the next few years. Politics will naturally be able to prolong it, but it will also be able to anticipate its decline. As for deregulation, a Congress with a different political sign than the current one could change everything again as early as next year and immediately start reregulating.
If we are dealing with blueberries acting on the supply side, the expansion can last much longer, the stock markets still have a way to go and central banks can raise rates calmly. If, on the other hand, we are faced with hormones destined to act temporarily on the demand side (see the boom in credit consumption and the sharp drop in savings in the United States), then the cycle, after the current flare-up, will end sooner than expected. you think, because central banks will be forced to brake faster and more aggressively.
2018 will be a challenging year for investors because, as we have already begun to see, two narratives will alternate and overlap. The first is that of accelerating healthy growth (at the moment it is above 4 in the United States and close to 3 in Europe) and strongly growing profits (much more in America than in Europe). The second is that of drugged and overheated growth which will force central banks to slow down or, if they really don't want to slow down for political reasons, to accept the inevitable arrival of inflation.
Inflation will settle the issue. You can't see it for now, but many in the market say they smell it. Things are complicated by the arrival of a new Fed president. Bernanke and Yellen, to legitimize themselves in the face of the markets, began by emphasizing the need to control inflation. If Powell does the same, stock markets will correct and the yield curve will flatten again.
In such a complex and volatile picture, the suggestion is to buy stocks on weakness and sell long bonds on strength. Bonds, in this cycle, have shown that they have nine lives and could very well have even a tenth if real inflation (for now only the expected one has risen) is slow in coming, but it is never better to bet on something that has the wind against . Cash or short maturities are better.
Stock exchanges, on the other hand, will be able to absorb the rise in interest rates and also a recovery in inflation provided that the process is gradual and provided that profits remain excellent.
