2021 could be the year the narrative changes

Covid-19 dominated the headlines in 2020, but it should also be remembered for the Reserve Bank of Australia embracing an assortment of avant-garde actions. In many cases, these have already been adopted by its contemporaries since the Global Financial Crisis, amounting to implementing Modern Monetary Theory. The RBA’s cash rate of 0.1 per cent is at its chosen lower bound and Phillip Lowe said the rate won’t rise until inflation is “sustainably” in the target band, so the rate won’t say much about the RBA’s future moves. For insights, we must watch for the consequences of both Quantitative Easing and the loans made to banks under the RBA’s Term Funding Facility (TFF) by turning to the composition and size of the RBA’s balance sheet.

The definition of insanity

Some bank analysts and observers estimate that through Quantitative Easing and the TFF the RBA’s balance sheet could triple and reach almost a third of GDP by the middle of next year. Through zero cash rates and bond buying, the RBA will shape a flat yield curve while funding the government deficits it outspokenly encouraged.

The Narcotics Anonymous organisation wrote in November 1981: “Insanity is repeating the same mistakes and expecting different results.” Does anyone seriously believe that ‘more of the same’ policies – those that hitherto delivered only a misallocation of resources, the adoption of unprecedented risk, bubbles and inequality but preciously little productivity growth - will miraculously begin to deflate the bubbles it created while delivering employment growth, rising productivity and standards of living?

Winners and losers

We believe there are at least two things investors shouldn’t miss in 2021. First, search for better returns amongst the boring stocks, those hurt by Covid lockdowns as well as those offering steady annuity-style incomes. A rotation from Covid winners to Covid losers is already under way thanks to Pfizer and Moderna.

Businesses worth investigating are those developing or generating boring and steady annuity-style income streams. Global pension funds are under pressure from retired investors to deliver a positive return, anything better than zero. These pension funds will apply much lower capitalisation rates, to steady income streams, than equity investors are currently prepared to. Telstra monetising its towers and the New South Wales government selling its gambling taxation revenues is testament to mergers and acquisition activity heating up for hitherto mundane income streams. And of course, a pension fund that privatises needn’t worry about subsequent stock market volatility.

Low-rate lessons

Secondly, be wary of an adverse shift in sentiment about the durability of MMT. Monetary and fiscal stimulus in 2020 and 2021 is merely a continuation of the policies implemented during the Global Financial Crisis. And where such policies have been implemented elsewhere, there has been little to show for it. In Japan, productivity remains quagmired and per capital GDP is unchanged from the mid 1990’s. The consequent budget deficits ensure only that the country remains heavily indebted. Low rates then become a permanent necessity.

It is indeed curious that in 2020 the lower-rates-for-longer narrative is accepted without question. Neither the withdrawal of stimulus, its consequences, inflation nor rate normalisation nor the risks of surplus nations turning the taps off to spendthrifts is being discussed. 2021 could be the year the narrative changes.

One thing investors can't ignore in 2021

The above wire is part of Livewire's exclusive series titled "The one thing investors can't ignore in 2021." The series will culminate in the release of a dedicated eBook that will be sent to readers on Monday 21 December. You can stay up to date with all of my latest insights by hitting the follow button below.