PIMCO will hold its 36th annual Secular Forum in Newport Beach May 8–10. Our focus, as always, is to identify the key secular forces that will drive the global economy, monetary and fiscal policy, and financial markets over the next three to five years. To help develop and refine our views, we will welcome this year a stellar lineup of invited speakers, hear fresh ideas from our newest class of MBAs, and encourage active debate among our investment professionals who gather from our offices around the world as well as our Global Advisory Board.
Our task at this year’s Secular Forum, as in forums past, is to develop a baseline view on where the global economy and economic policies are heading as well as conduct a thorough analysis of the plausible left- and right-tail scenarios of material divergence from that baseline. Following the forum, PIMCO’s Investment Committee will assess and then communicate to our clients the key investment implications that emerge from the forum’s conclusions. As at every forum, we have three choices: to reaffirm our secular view, to refine our secular view, or to replace our secular outlook in light of events that have taken place since the previous forum. We’ve found over the years that the PIMCO Secular Forum provides the concept, the construct and the compass to help us navigate global markets by keeping our focus on broad secular trends – markets day to day may fluctuate and, if we are correct, mean revert to these secular trends.
In May 2016, we concluded that the global outlook appeared to be stable but that the underlying foundations for global growth, inflation and financial markets were increasingly insecure (see Figure 1 and our essay “The Global Outlook: Stable But Not Secure”).
We saw a global economy generating growth just fast enough to avoid stall speed but with no evident or prospective source of productivity or organic demand that would support a baseline for more robust expansion. We saw central banks accommodating this New Normal with New Neutral policy rates set well below those that prevailed before the financial crisis, but we also saw growing evidence of monetary policy exhaustion and diminishing or even negative consequences from negative interest rates and ever-expanding quantitative easing (QE) programs in Europe and Japan. We recognized that our New Neutral thesis – introduced at the May 2014 forum when markets were pricing in a 4% neutral fed funds rate – had by May 2016 been more than fully priced in and embraced by the Fed in its own projections (see Figure 2).
We discussed the many challenges confronting China – debt overhang, capital account liberalization, transition to a dirty float – and also highlighted the secular risks to the global economy in the face of a surge in populist, parochial political movements in the U.S., UK and Europe. In sum probability distributions have both left and right tails, so that the global economy could surprise on the upside, our secular thesis was that with risks to global economic stability rising, investors should be compensated up front for the growing and heightened uncertainty and potential consequences of monetary policy exhaustion that they faced in the context of subdued growth expectations and business and consumer sentiment.
Fast-forward to today. At the risk of understatement, one might say a lot has happened since May 2016 – Brexit, the U.S. presidential election, and the buoyant market reaction to these two Black Swan events – that will require us at the May 2017 forum to think hard and debate earnestly with our invited speakers as we seek to determine if the U.S. and perhaps even the world economy and market are, as some suggest, transitioning to a new paradigm. Or is the real risk a downward spiral into a global trade war in a G-Zero world? That said, as our colleagues Joachim Fels and Andrew Balls wrote in December 2016 (“Into the Unknown”), the stable but not secure macro environment we discussed in May has arrived, perhaps earlier than we ourselves expected. All three of the risks that we saw on the secular horizon – monetary policy exhaustion (the Bank of Japan abandoning QE, the European Central Bank tapering QE), the rise of populism (Trump, Brexit), excessive debt now priced with “redenomination risk” in some countries (Italy, France) – have materialized.
But of course that is only part of the story, and perhaps even the least surprising part. Since the summer, global macro data – and even more so global sentiment – has rebounded surprisingly to the upside (see Figure 3). Global markets have noticed, with stocks and emerging market (EM) currencies sharply higher, credit spreads tighter and bond yields higher. In the U.S., so far the big move has been in the “soft” sentiment data, but there can be little doubt that in the lead up to our May 2017 forum, markets are romancing the idea of a new paradigm for the U.S.
One appeal of the new paradigm concept is that it means different things to different people, but broadly speaking the idea is as follows. The handoff from monetary to fiscal policy, coupled with some combination of business tax reform, tax cuts and a properly designed infrastructure plan, stimulates U.S. business investment, employment and incomes. A push to ease regulation in banking spurs lending to small businesses, and the energy sector benefits from the deregulation priorities of the new administration. With strong private investment and an increase in infrastructure spending, prospects for productivity improve and the observed boost in “animal spirits” is ratified by faster growth.
However, as we discussed at our December and March Cyclical Forums, there is left- and right-tail risk associated with the potential shift in U.S. policy under the new administration, especially as regards U.S. trade policy and the risk of foreign retaliation should the U.S. seek to pursue its interest more assertively within the world trading system. So one of the big questions we will try to answer at the May 2017 forum is: Will prospects for animal-spirited demand growth and the potential fiscal policy pivots outweigh pitfalls from a possible protectionist pileup?
Developing an outlook for the U.S. economy and markets is an important objective of our forum but certainly not the only one. PIMCO invests globally and even the portfolios we manage against U.S. benchmarks are significantly influenced by global factors. Right now, the consensus (IMF) outlook for the global economy sees world GDP growth rising from 3.1% in 2016 to 3.7% by 2020, with a big part of this driven by a projected pickup in EM growth (see Figure 4).
There are obviously risks to this scenario on both sides. How the global economy and markets evolve over the next three to five years will depend on the ultimate answers to these questions:
What is the endgame for – and what are the consequences of ending – unconventional monetary policy?
What are the economic and financial implications of the rise of political polarization, populism and deglobalization?
How will China navigate the economic, trade, leadership and geopolitical transitions that will follow the important meeting of the 19th National Party Congress later this year?
This essay is a preview, so I won’t speculate on where we will come out on these questions. Going into this Secular Forum, I myself have not made up my mind on how I would answer them. But what I can say now is that with the speakers we have invited, and with the insights provided by our Global Advisory Board, we will certainly be in a good position to answer them.
Lawrence H. Summers
Former Secretary of the Treasury in the Clinton Administration, Director of the White House National Economic Council in the Obama Administration, President of Harvard University and Chief Economist of the World Bank
Author, Neuroscientist and Director of the Affective Brain Lab, London
The Honorable Newt Gingrich
2012 Republican Presidential Candidate and Speaker of the U.S. House of Representatives (1995–1999)
Author and President of Eurasia Group
Governor, Reserve Bank of India (2013–2016); Chief Economist and Director of Research, International Monetary Fund (2003–2006); Distinguished Service Professor of Finance, University of Chicago Booth School of Business; Author
The Honorable Gary Locke
U.S. Ambassador to the People’s Republic of China (2011–2014), Secretary of Commerce (2009–2011) and Governor of Washington (1997–2005)
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