The new supply-side policy put

Governments’ increasingly interventionist fiscal ‘solutions’

During 2023’s Silicon Valley Bank implosion, the U.S. Treasury ordering the FDIC to make good on all banking deposits was a clear signal that the government rescue reflex is not only alive but gaining strength. After a decade of regulatory reform designed to reduce systemic risks, this time was meant to be different. Alas, not. With every new crisis, the solution seems to be the same: another government backstop. If anything, the pandemic, given the size and scale of the stimulus, simply normalized these policies.

What has changed, however, is that fiscal – rather than monetary policy – is the new bailout mechanism. For the last four decades, policymakers have largely focused on demand management through central bank activity: interest rate changes, quantitative easing, and the like. Now, government activism is focused squarely on the supply side. In fact, most fiscal policymakers now clearly view their role as one with responsibility for shaping the economic structure and direction of growth. Apparently, any problem can be solved with a fiscal solution. Pandemic? Support household incomes. Geopolitical tensions? Engage industrial policy. Inflation? Assist consumers with the cost-of-living crisis (note Biden’s cunningly branded “Inflation Reduction Act”). The list goes on.

Any future crises will put governments under even greater pressure to inject more money into their economies. Nowhere is this more evident than the EU, where fiscal rules have become increasingly flexible through the pandemic and Ukraine war.

Investment implications

Where does all this leave investors? Ultimately, it removes deflationary tail risks and skews the range of potential outcomes over our Super Trend horizon (3-5 years) towards higher inflation and higher asset prices. Any downturn will be mild and short-lived, given robust fiscal policy. A key reason why the recession call was wrong in 2023 is an underappreciation for persistent government deficits. Most investors are still assuming a fast-moving downturn like 2008 or 2020. But the current environment is far more like the 1950s and 1960s, where labour shortages and an investment boom prolonged the cycle. The main takeaway is that the cycle simply took longer to unfold.

Of course, capitalism is not supposed to work this way. Over time, bailouts lower productivity, economic growth, and living standards, as the big beneficiaries are large, established companies, which crowd out creative destruction and diminish business dynamism. Theoretically, the potential cost of supply side dominance is inefficiency: As governments become more involved in managing the economy, they have more opportunities to choose bad policies.

These risks are, however, conceptual. For now, governments remain stimulative, and nominal global growth is trending higher. A nuance that should not be overlooked, however, is that fiscal policies remained far more orthodox in emerging markets relative to the developed ones (unsurprisingly, and in a departure from history, inflation has generally been more tame in EM over the last few years).

America has been the most interventionist by far. But this shouldn’t be surprising after a decade where the U.S. had among the lowest cost of capital, the largest stock market boom, and raging animal spirits – which led to the largest financial excess and leverage. These excesses are now surfacing and regulators are acting.

Over the coming weeks, Forstrong’s investment team, a collective with several centuries of combined global experience, will share our best ideas about the world’s most important Super Trends – those enduring themes that will have the largest impact on capital markets. Our hope is that our Super Trends 2024 report will help investors make sense of the unfolding macro landscape and unravel some of the market’s mysteries.

Tyler Mordy, CFA, is CEO and CIO of Forstrong Global Asset Management Inc., engaged in top-down strategy, investment policy, and securities selection. This article first appeared in Forstrong’s Super Trends 2024. Used with permission. You can reach Tyler by phone at Forstrong Global, toll-free 1-888-419-6715, or by email at tmordy@forstrong.com. Follow Tyler on X at @TylerMordy and @ForstrongGlobal.

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