Gavekal: Analysts Wearing “Economic Beer Goggles”

Gavekal household wealth

David Hay, chief investment officer at Evergreen / Gavekal, looks at promises of “sustainable acceleration” continually made relative to the global economy and applies an old saying, with a twist.  “Fool me once, shame on you. Fool me twice, shame on me,” he writes in his most recent investment letter, then considers the multiple times he’s heard assurances the global economy was about to take off and quips: “What about, ‘Fool me four times?’”

Gavekal Chief: Establishment analysts wearing “economic beer goggles”

Hay takes direct aim at the US Federal Reserve and their central bank cronies and related cheerleaders around the world to humorous effect, according to a recent memo from the firm.  Addressing the cheerleaders and blind faith believers in Fed policy, the letter notes those who have been wearing “economic beer goggles” have been the architects of, or apologists for, prevailing policies—”a set of supposedly growth-stimulating measures so extreme that they might have caused John Maynard Keynes to blush.”

Noting the prevailing opinion that 2014 was going to be “different,” Hay notes the weather excuse and looks to Europe where the latest bout of sluggishness is blamed on a mild winter. Excuses, excuses, excuses.  “If you think back to widely-held views of a few years ago, this is the precise opposite of what was supposed to happen, given the ultra-easy monetary policies by most of the world’s dominant central banks,” Hay wrote. “For the optimists, rapid growth was just around the corner. But, despite zero or near-zero interest rates, countless trillions in deficit spending in most leading countries, and massive money creation in the US and Japan, inflation and growth remain largely MIA.”

Gavekal Chief: Stimulative Fed policy fails to halt slide in real household wealth

Noting the impact of the Fed’s simulative policies on economic reality, he considers wages and salary as a percentage of GDP.  It doesn’t tell a good story. “As you can see below, this trend has been in place since the early 1970s, but it accelerated after 2000, when we first began to see excessively easy Fed policies (first to combat the tech bubble bust and then the housing meltdown).”


Gavekal Chief:: Asset price measurement

But the impotence of central bank economic efforts don’t end there.  While the Fed measures its success based on a rise in asset prices – stock market and home prices – when measuring the impact of QE stimulative policies on average mortals, real household earnings, Hay notes the Fed’s policy is not an equal opportunity growth machine. Real household earnings peaked around 2000, he notes, “when the Fed went into extreme ‘stimulation’ mode (with a brief hiatus from 2005 to 2007), and have been in a bear market ever since.”

Gavekal household wealth

When connecting the dots on “real” economic statistics that measure average household wealth, Hay looks at the fall in real household wealth relative to Fed simulative efforts and says: “It could be, but much like Sherlock Holmes, we’re not big believers in coincidences.”



About the Author

Mark Melin
Mark Melin is an alternative investment practitioner whose specialty is recognizing a trading program’s strategy and mapping it to a market environment and performance driver. He provides analysis of managed futures investment performance and commentary regarding related managed futures market environment. A portfolio and industry consultant, he was an adjunct instructor in managed futures at Northwestern University / Chicago and has written or edited three books, including High Performance Managed Futures (Wiley 2010) and The Chicago Board of Trade’s Handbook of Futures and Options (McGraw-Hill 2008). Mark was director of the managed futures division at Alaron Trading until they were acquired by Peregrine Financial Group in 2009, where he was a registered associated person (National Futures Association NFA ID#: 0348336). Mark has also worked as a Commodity Trading Advisor himself, trading a short volatility options portfolio across the yield curve, and was an independent consultant to various broker dealers and futures exchanges, including OneChicago, the single stock futures exchange, and the Chicago Board of Trade. He is also Editor, Opalesque Futures Intelligence and Editor, Opalesque Futures Strategies. - Contact: Mmelin(at)valuewalk.com