Each year since 1978, the Federal Reserve Bank of Kansas City has sponsored a symposium convening central bankers, finance ministers, economists and academics to discuss specific issues relating to monetary policy. This year’s meeting was held on Friday at the picturesque Jackson Hole in Wyoming.
Value investors would seldom pay much attention to such meetings, historically. But in today’s market environment, in which asset prices are increasingly being driven more by policymakers and less by fundamentals, investors absolutely need to pay attention.
The keynote speech from Chair of the Federal Reserve (Fed), Janet Yellen, was the focus for global markets. The decision for the Fed to tighten its monetary policy, or not, and over what timing – is unfortunately the single most important driver of global equity prices over the near and medium term. Trying to predict interest rate movements is futile, in our view, though investors can learn valuable insights by paying attention.
So what did we learn from Yellen’s speech, which can be read in full here? Well, the truth is that much of her speech was focused on the Fed’s recently expanded “toolkit” for manipulating monetary conditions. Yellen explains the mechanics behind the Fed’s implementation of many of its new tools since 2006 – thoroughly fascinating if you’re that way inclined.
What is the deeper meaning behind this explanation of monetary tools? Well, in our view, it is a great illustration of imagination and innovation. And it serves to suggest that policymakers do not feel limited by the levers they have at their disposal today (or even by the laws that restrict their mandate, which can evidentially be changed if conditions require). Policymakers can effectively control the shape of the yield curve; if they want higher or lower asset prices, they can control these too. It is both remarkable and horrifying – especially if you were under the illusion that we live in a free market regime.
But Yellen would be remiss not to make a comment about the current economic environment and expected trajectory of monetary policy. (Actually, she had little choice as any lack of commentary about a rate rise would be interpreted as an abandonment of any near term monetary tightening by the market). To cut to the chase, Yellen effectively had a bet each-way:
So, Yellen cleverly addressed the issue of near-term interest rate movements without providing any meaningful new information.
What is much more interesting and important for long-term investors, in our view, was the following comment:
While this is not a new data point, by Yellen highlighting this forecast she is essentially reiterating the following: that we are now living in a lower-returning environment. This is something we have been arguing for some time and is driven, in part, by deteriorating demographics (i.e. ageing populations) around the world; as well as by heavily indebted public balance sheets that lack the capacity to invest. And this has implications for investors and provides a strong argument for high quality active management, in our view – though this is a topic we will explore more deeply in a subsequent blog.
So, with this recent update from the world’s most important policymaker, we go back to doing what we do every single day. And that is the detailed analysis of the fundamental value drivers of individual businesses around the world. We look forward to the day when these are the sole drivers of stock prices – though, unfortunately, we do not expect this day to arrive any time soon.