Transcript: After years of turbulence, new tools are needed to track global economy

Chris Dillon (CD): It’s important to give policy makers credit for averting what could have been an absolute economic disaster with the outbreak of Covid 19. A global economic depression was avoided and now there’s many complaints about policy makers being behind on inflation. But in terms of how bad it could have been, in early June of 2020, the Atlanta Fed GDP Now was showing U.S. economy on pace for a minus 53%. That’s an Armageddon-type economic scenario, but that’s what the data was telling us. By October 28, 2020, that metric had reversed itself to not be negative. It was actually positive 37%. If we’re tabulating how successful central bank actions were, we would say, “Mission accomplished! The lights have stayed on. Let’s give global policymakers credit.”

Global macroeconomic factors he’s watching.

CD: Macroeconomic factors would be nothing that I think would surprise the audience here today. You think of manufacturing data. The United States had a manufacturing-bias or -leaning in the mid-1970s. But since that time, the U.S. economy has evolved [into] a much more service-based economy. So, service economy data, inflation data, and then wages that feed into that, earnings, margin data, and the direction of central bank action. Those are all things that we’re looking at on an ongoing basis. But let me fast forward to the pandemic and how it put some extra metrics on our radar. When we’re now flirting with recession, looking at economic data on a real-time basis, that amplifies in importance. But then, here’s where it gets interesting. The Federal Reserve Bank of New York has a Global Supply Chain Pressure Index. That index has averaged 0.02, going all the way back to 1996. That index reached as high as 4.31 in December of 2021. That Global Supply Chain Pressure Index is now 1.47, which indicates recovery in terms of global supply chain pressure. And this gets to another metric that we look at from the Atlanta Fed: Flexible CPI, looking at real time pain points in the economy that are being hurt by inflationary trends. That Atlanta Fed Flexible CPI was averaging a couple of hundred basis points, pre-pandemic. [It] got as high as 21% at the height of the supply chain distortions. Now that number is 16.25%, on its way down. So many different parts here, but we’ve had to add to the toolkit because the pandemic.

Central bank successes.

CD: There is an actual central bank body and they actually vote on who they think the best central bank is. Spring of last year, it was the central Bank of South Korea. They reacted quickly with a cut in policy rates, earlier than many others when the pandemic was looming on the horizon and gaining momentum. And while Jerome Powell was saying inflation is transitory, the central Bank of South Korea was already raising interest rates. I think beyond that, I would look to China and its just unbelievable historical economic expansion since they decided to modernize decades ago. There are by-products of that rapid growth over time. And their policy is allowing their economy to stay on track while they’re dealing with a real estate bubble, while they’re also dealing with Covid 19. And finally, I’ll point to Brazil. Eighteen months ago, policy rate in Brazil was north of 2%; today it is 13.75%. Roberto Campos Neto [president of the Central Bank of Brazil] — I may be mispronouncing that — a policy maker in Brazil, voted by other central bankers as the central banker of the year in 2021, [he’s] somebody else of note. So, I’d point to those three central banks as noteworthy in terms of central banks being quite adept here in terms of dealing with the extraordinary by-product of Covid-19.

And finally, what’s the take away on central bank efforts to date?

CD: A year ago, you needed an 85% equity allocation in your 60:40 portfolio if you wanted to get a 6% rate of return in the go-forward decade. Today it is back to 60%. So, stay invested. The markets up 85%. Yes, central banks are not our friend at this moment in time. But they are creating a pathway for a 6% to 8% stock return which is what we should expect as investors all along. So, stay invested, stay diversified, say goodbye to TINA [“There Is No Alternative” to equities], say hello again to your 60:40.

Well, those are today’s Soundbites, brought you by Investment Executive and powered by Canada Life. Our thanks again to Chris Dillon of T. Rowe Price.

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