By Tom Bradley
Has it come to this?
After China reported its 4th quarter economic data this week, there was a quote in the Financial Times from Xu Gao, chief economist at Everbright Securities in Beijing. He said, “Based on this data, policymakers definitely need to do more.”
Hmmmm. The policymakers need to do more. China’s economy grew by 6.8% in the fourth quarter, faster than virtually any other country in the world. Its growth has been aided by an alarming increase in the use of debt.
And then closer to home, Bank Governor Poloz was forced to justify why he didn’t lower the key lending rate, which is currently at ½%. Yes, one half of one percent.
It’s now a knee-jerk reaction. Almost like talking about the weather. Whenever an economic statistic comes up a little bit short, we hear that the central banker in question has to do something. It’s a sound bite the media will always use.
Monetary policy can affect economic growth at certain times, but its impact is almost always overrated. And with interest rates at close to zero, the ability of central bankers to move the economic dial is nil. Interest rate cuts have long since lost their effectiveness.
The bankers might be able to move the capital markets for an hour or so (speaking of knee-jerk reactions), but that’s about it ... an hour or so.
The best analogy I can come up with for the current state of monetary policy is the vending machine. If something goes wrong and you push the coin return button, nothing happens. You can push it harder and harder and harder, but the result is the same.
How should investors digest the actions and comments of central bankers, and the media barrage around them? By not putting a lot of weight on them. A well-diversified portfolio isn’t going to fall off track or suffer over the long run because of the near-term actions of central bankers. Portfolio returns are driven by company earnings, not monetary micro-management.