Credit Suisse's Wilmot: Boom More Likely than Doom
Could the global economy be entering a period of strong, sustainable growth with continued low interest rates?
That scenario looks possible, despite structural problems that have held back growth, says Credit Suisse's Head of Macro Investments, Jonathan Wilmot.
At the 2015 Asian Investment Conference, Wilmot laid out three possible scenarios for the road ahead: doom, in which a deflationary collapse leads to political, financial and economic chaos; boom, in which China, Japan and Europe rebound on the strength of deft policy decisions and cheaper energy; and divorce, in which the U.S. continues its steady improvement while the rest of the world remains sluggish.
Numerous structural challenges persist: demographic decline, secular stagnation, the debt super-cycle, extreme inequality, the death of productivity growth, even climate change.
Easy money can only support today's asset values for so long, the doom argument goes. Equities, credit, bonds, and real estate markets face harsh correction, as quantitative easing runs its course and the Federal Reserve prepares to raise benchmark interest rates.
On the positive side, the boom argument is supported by both structural and cyclical factors: the huge reservoir of pent-up demand left over from the 2008-2009 crisis; policymakers' response to evolving challenges; the stimulus of cheaper energy; and the rise of machine learning and productive power. All of this points to "massive investment opportunities" to be funded.
But the boom scenario also implies the need for an ongoing subsidy from savers to borrowers – and ultimately to entrepreneurs and the "massive investment opportunities" that they represent. Through outright debt forgiveness and continuation of extraordinarily low risk-free rates, this subsidy will foster a slow and orderly deleveraging and an increase in available capital that will help stimulate entrepreneurship.
Many analysts foresee the divorce scenario – continuing growth divergence between the U.S. and the rest of the world. The strengthened dollar – while helpful for some export markets – restricts liquidity and capital flows to Asia and other emerging markets.
But GDP growth in Japan and the Eurozone are beginning to trend higher, bolstered by aggressive stimulus through low interest rates and QE programs. Corporate profits and equity markets – which have risen steadily in the U.S. in recent years, are just beginning to trend higher globally.
"Policy outside the U.S. is finally moving in a decisively stimulative direction," Wilmot said.