To paraphrase Hobbes, life in the jungle is nasty, brutish and short. It is driven by short termism – ‘eat that zebra now because you may not be alive tomorrow to enjoy it’. Thankfully the human condition has evolved since our days in the jungle. We developed complex socio-economic structures through rational thought and strategic planning. But you wouldn’t know that by observing our political leaders and economic policy makers these days. They seem to hold a Hobbesian worldview held hostage by the sentiment of financial markets.
Until recently the US had been the epicenter of this ‘cult of the Dow’, and it is easy to see how US policy makers have fallen into this trap. The total market cap of US equity markets is 125% of GDP, and over 25% of US individual investors have long-term investments (specifically retirement accounts) in financial market instruments. Stock market crashes or long term bear markets are very much felt on Main Street.
But since the GFC this affliction of “short termism” has spread to the EU, Japan and even centrally planned China, where financial markets play a less important role in the overall economy because most financing comes from banks (comparable ratios of market cap to GDP are 50% in the EU, 70% for Japan and just 43% in China). These are also countries where financial market participation has largely been avoided by all but the wealthiest individual investors who tend to favor property and cash holdings. Why EU, Japanese and Chinese policy makers are acting like frightened gazelles spooked by growls from the underbrush, gives pause for thought.
China is the newest entrant to the jungle, when the Party this year deliberately sparked a run up in the market to help over leveraged corporates improve their balance sheets by allowing Chinese retail investors the opportunity - for the first time in history – to buy shares on margin and in Hong Kong. But like most economic tweaking in China, it overshot its mark and ran up 150% plus in the space of 18 months, only to start unwinding rapidly at the start of summer. Spooked by the prospect of potential social unrest, the Party watchdogs caved when the market inevitably corrected.
The US is perhaps only now learning that basing policy on market reaction is the tail wagging the dog. Financial markets while still driven by animal instincts should only serve as ONE indicator of overall economic well-being. More critical for the long term health of any socio-economic entity are things like real GDP growth, industrial production levels, labor participation, infrastructure, education and skills base, home ownership, competitive markets, exchange rates, etc. One government that has done this well for some time is Singapore.
The US has been on a roller coaster ride of asset bubbles for nearly 30 years, and voices in the wilderness – Hillary’s call for higher taxation on short term capital gains to support longer term investments – is exactly the anti-dote that may cure the US of a short term jungle mentality where only a handful of Apex predators flourish. This could steer the US firmly back on a path to real growth. As interest rates rise, policy makers will have a choice; some will continue to react like frightened gazelles and pump up politically expedient asset bubbles, but here’s to hoping the majority will choose to chart a more sustainable path to real long term growth.
This post was drafted with Dane Chamorro.