Ferguson vs. Burbank by Worth Wray- STA Wealth Management

For What It’s Worth… Ferguson vs. Burbank, There Can Be Only One

Written By: Worth Wray
Chief Economist & Global Macro Strategist

“In the end, there can be only one.” ~ Sean Connery in The Highlander (1985)

Summary

  • This week’s issue of For What It’s Worth features two of the world’s sharpest macro thinkers: Niall Ferguson & John Burbank.
  • Though they both believe – as I’ve been writing since mid-March – that global policy elites are working behind the scenes to stave off a global financial crisis and stabilize global markets, Niall believes this effort is working and John believes it’s bound to fail.
  • That simple disagreement leads them to dramatically different macro outlooks.
  • While Niall Ferguson believes historians will look back on February 2016 as the inflection point where the world started to work off its post-2008 hangover, John Burbank believes the temporary reflation we’re seeing in global markets may eventually give way to a global liquidation event compounded by the risk of a US recession, a Chinese RMB devaluation, and a Trump US presidential win.
  • At STA, we are positioning our client portfolios to manage the downside risks that Burbank describes while staying alert to any meaningful signs that Ferguson’s “inflection point” thesis rings true over time.
  • In the end, there can be only one; but we’ll only know for sure with the benefit of hindsight.

There Can Be Only One

This week’s issue of For What It’s Worth features two of the sharpest macro thinkers in the world: Niall Ferguson & John Burbank.

Though they agree – as I’ve been writing since mid-March (see “Did Central Banks Just Save the World,” & “You Can’t Blame Them for Trying”) – that global policy elites are working behind the scenes to stave off a global financial crisis and stabilize global markets, Niall believes this effort is working and John believes it’s bound to fail.

That simple disagreement leads them to radically different outlooks. And like Sean Connery’s character notes in the 1985 classic The Highlander, “In the end, there can be only one.”

Ferguson: “February 2016 was the global inflection point.”

Aside from his current role as a Senior Fellow at Stanford University’s Hoover Institute, Niall Ferguson is one of the world’s leading historians, a recently retired Harvard University professor, and the author of fourteen books including The Ascent of Money, Civilization, Empire, Colossus, The Great Degeneration, and The House of Rothschild.

He has also been a rather outspoken critic of the warped, model-driven thinking that’s captured the world’s most influential policymaking institutions like the Federal Reserve, the European Central Bank, or the International Monetary Fund in recent years… which makes his most recent comments so interesting.

All of the sudden, Professor Ferguson has changed his tune.

Central banks – he now argues – are winning the war against deflation. Not only did they prevent a replay of the Great Depression in 2008 and 2009, and save the Euro Area from outright collapse in 2012, but now they’ve managed to set the global economy on a radically new path in February 2016.

Most people are still missing it, as he explained to a packed house at John Mauldin’s latest Strategic Investor Conference, but that’s the nature of turning points.

Ferguson vs. Burbank, There Can Be Only One - STA

“The inflection point is happening,” he said in an interview with the Financial Review shortly before Mr. Mauldin’s Strategic Investor Conference. “But it will only be visible in about a year, and is barely perceptible to most people now… but there are forces that are turning the world economy around.”

On this point, let me just say that I understand where Niall is coming from (for at least part of his argument)… and I am baffled by his overwhelming sense of certainty. [To be clear, I’m not trying to criticize or belittle the professor’s view. This is one of the most interesting macro arguments I’ve heard in months and I DESPERATELY want to know why he feels so certain that February 2016 was the inflection point in our global debt, demographic, & deflation drama.]

If you recall, I offered a similar hypothesis in mid-March when – immediately after a quiet meeting on the sidelines of the G-20 summit in Shanghai – the European Central Bank, the Bank of Japan, and the Federal Reserve all appeared to prioritize weakening and containing the US dollar over their domestic policy goals (“Did Central Banks Just Save the World?”).

While Japan and Europe had been winning the currency wars by steadily weakening their exchange rates against the United States and China, this kind of “every central bank for itself” policy-making brought the world to the edge of a global crisis by early 2016.

Ferguson vs. Burbank

Not only did the divergence between foreign central banks and Fed policy result in a big rise in the US dollar, it also led to a disorderly drop in the price of dollar-denominated commodity prices, an outright exodus of foreign capital from major emerging markets like China, Russia, Brazil, and South Africa, and a 15% collapse in global trade in US dollar-terms.

Ferguson vs. Burbank

Needless to say, these trends created waves in global economic and financial systems still trying to heal from the 2008 downturn and threatened to unleash enormous shocks unless global policy elites opted to intervene by weakening/containing the US dollar and stemming the tide of outgoing capital from the People’s Republic of China.

I did not think such an arrangement was possible in the run-up to the G-20’s late February gathering of central bankers and finance ministers in Shanghai, but that’s exactly what we started to see in mid-March.

First the European Central bank cut its target interest rate and expanded its asset purchase program to include corporate bonds while Mario Draghi intentionally reset the market’s expectations for future easing. Rather than falling on new stimulus, the euro rallied.

Ferguson vs. Burbank

Then Bank of Japan Governor Haruhiko Kuroda backed off on his February guidance to keep dropping his target interest rate deeper into negative territory and proceeded to sit on its hands for the following three months. Like we saw in Europe, the Bank of Japan allowed the yen to rise despite its domestic policy needs.

Ferguson vs. Burbank

And finally, the Federal Reserve dropped its 2016 guidance from four rate hikes to two before Janet Yellen delivered one of the single most dovish speeches in recent memory citing concerns that the disorderly drop in oil prices along with uncertainty surrounding China’s exchange rate called for extreme patience in hiking US interest rates.

Ferguson vs. Burbank

As you can see in the chart below, these collective moves led to a big drop in the US dollar, a resurgence in global commodity prices, and a modest reflation in emerging market currencies…

Ferguson vs. Burbank