The global crisis in conservatism

Today’s right is not an evolution of conservatism, but a repudiation of it

VLADIMIR PUTIN, Russia’s president, has declared the liberal idea “obsolete”. It will not surprise you to learn that we disagree. Not just because he told the Financial Times that liberalism was all about immigration, multiculturalism and gender politics—a travesty—but also because he picked the wrong target. The idea most under threat in the West is conservatism. And you do not have to be a conservative to find that deeply troubling.

In two-party systems, like the United States and (broadly) Britain, the right is in power, but only by jettisoning the values that used to define it. In countries with many parties the centre-right is being eroded, as in Germany and Spain, or eviscerated, as in France and Italy. And in other places, like Hungary, with a shorter democratic tradition, the right has gone straight to populism without even trying conservatism.

Conservatism is not so much a philosophy as a disposition. The philosopher Michael Oakeshott put it best: “To be conservative…is to prefer the familiar to the unknown, to prefer the tried to the untried, fact to mystery, the actual to the possible, the limited to the unbounded, the near to the distant.” Like classical liberalism, conservatism is a child of the Enlightenment. Liberals say that social order emerges spontaneously from individuals acting freely, but conservatives believe social order comes first, creating the conditions for freedom. It looks to the authority of family, church, tradition and local associations to control change, and slow it down. You sweep away institutions at your peril. Yet just such a demolition is happening to conservatism itself—and it is coming from the right.

The new right is not an evolution of conservatism, but a repudiation of it. The usurpers are aggrieved and discontent. They are pessimists and reactionaries. They look at the world and see what President Donald Trump once called “carnage”.

Consider how they are smashing one conservative tradition after another. Conservatism is pragmatic, but the new right is zealous, ideological and cavalier with the truth. Australia suffers droughts and reef-bleaching seas, but the right has just won an election there under a party whose leader addressed parliament holding a lump of coal like a holy relic. In Italy Matteo Salvini, leader of the Northern League, has boosted the anti-vaxxer movement. For Mr Trump “facts” are just devices to puff up his image or slogans designed to stir up outrage and tribal loyalties.

Conservatives are cautious about change, but the right now airily contemplates revolution. Alternative for Germany has flirted with a referendum on membership of the euro. Were Mr Trump to carry out his threats to leave NATO (see “The World If” in this issue), it would up-end the balance of power. A no-deal Brexit would be a leap into the unknown, but Tories yearn for it, even if it destroys the union with Scotland and Northern Ireland.

Conservatives believe in character, because politics is about judgment as well as reason. They are suspicious of charisma and personality cults. In America plenty of Republicans who know better have fallen in with Mr Trump even though he has been credibly accused by 16 different women of sexual misconduct. Brazilians have elected Jair Bolsonaro, who fondly recalls the days of military rule. The charismatic Boris Johnson is favourite to be Britain’s next prime minister, despite being mistrusted by MPs, because he is deemed to be the “Heineken Tory” who will, like the beer, refresh the parts other conservatives cannot reach.

Conservatives respect business and are prudent stewards of the economy, because prosperity underpins everything. Hungary’s prime minister, Viktor Orban, paints himself as a low-tax economic conservative, but undermines the rule of law on which businesses depend. Mr Trump is a wager of trade wars. Over 60% of Tory members are willing to inflict “serious damage” on the economy to secure Brexit. In Italy the League is spooking markets by toying with issuing government paper that would act as a parallel currency to the euro. In Poland Law and Justice has splashed out on a welfare bonanza. In France, in the campaign for the European Parliament elections, the rump Republican Party made more of a splash about Europe’s “Judeo-Christian roots” than prudent economic management.

Last, the right is changing what it means to belong. In Hungary and Poland the right exults in blood-and-soil nationalism, which excludes and discriminates. Vox, a new force in Spain, harks back to the Reconquista, when Christians kicked out the Muslims. An angry, reactionary nationalism kindles suspicion, hatred and division. It is the antithesis of the conservative insight that belonging to the nation, a church and the local community can unite people and motivate them to act in the common good.

Conservatism has been radicalised for several reasons. One is the decline of what Edmund Burke called the “little platoons” that it relied on, such as religion, unions and the family.

Another is that the old parties on both right and left were discredited by the financial crisis, austerity and the long wars in Iraq and Afghanistan. Outside the cities, people feel as if they are sneered at by greedy, self-serving urban sophisticates. A few have been wound up by the xenophobia of political entrepreneurs. The collapse of the Soviet Union, some believe, loosened the glue uniting a coalition of foreign-policy hawks, libertarians and cultural and pro-business conservatives.

None of these trends will be easy to reverse.

The right stuff

That does not mean everything is going the way of parties of the new right. In Britain and America, at least, demography is against them. Their voters are white and relatively old.

Universities are a right-wing-free zone. A survey by Pew last year found that 59% of American millennial voters were Democratic or leaned Democratic; the corresponding share of Republicans was only 32%. Among the “silent generation”, born in 1928-45, Democrats scored 43% and Republicans 52%. It is not clear enough young people will drift to the right as they age to fill the gap.

But the new right is clearly winning its fight against Enlightenment conservatism. For classical liberals, like this newspaper, that is a source of regret. Conservatives and liberals disagree about many things, such as drugs and sexual freedom. But they are more often allies. Both reject the Utopian impulse to find a government solution for every wrong. Both resist state planning and high taxes. The conservative inclination to police morals is offset by an impulse to guard free speech and to promote freedom and democracy around the world. Indeed conservatives and liberals often bring out the best in each other. Conservatism tempers liberal zeal; liberals puncture conservative complacency.

The new right is, by contrast, implacably hostile towards classical liberals. The risk is that moderates will be squeezed out as right and left inflame politics and provoke each other to move to the extremes. Voters may be left without a choice. Recoiling against Mr Trump, Democrats have moved further to the left on immigration than the country at large. The British, with two big parties, may have to pick between Jeremy Corbyn, Labour’s hard-left leader, and a radicalised Tory party under Mr Johnson. Even if you can vote for the centre, as with Emmanuel Macron in France, one party will win repeatedly by default—which, in the long run, is unhealthy for democracy.

At its best conservatism can be a steadying influence. It is reasonable and wise; it values competence; it is not in a hurry. Those days are over. Today’s right is on fire and it is dangerous.

The World's Bank

Vast Chinese Loans Pose Risks to Developing World

By Bartholomäus Grill, Michael Sauga and Bernhard Zand

The Colombo Port City project in Sri Lanka, seen here, was funded by $1.4 billion from China.

China is the largest creditor in the world, funding infrastructure projects in the developing world in exchange for access to raw materials. A new study shows that the risk of a new debt crisis is significant.

The future rail link cuts its way through the jungles of Laos for over 400 kilometers. Soon, trains will be rolling through -- over bridges, through tunnels and across dams built just for the line, which runs from the Chinese border in the north to the Laotian capital of Vientiane on the Mekong River.

After five years of construction, the line is set to go into service in 2021. And the Chinese head of one of the sections has no doubt that it will be finished on time. "Our office alone employs 4,000 workers," he says. There is also no lack of money: The Chinese government in Beijing has earmarked around 6 billion dollars for the project and has recently become both Laos's largest creditor and most significant provider of development aid.

China, after all, isn't just directly financing 70 percent of the new train lain, it is also building dams, schools, military hospitals and has even launched a communications satellite into space for the country. In April, Beijing loaned Laos another 40 million dollars for road construction -- a credit that was provided through the multilateral Asian Infrastructure Investment Bank based in Beijing, a financial institution that China established as an alternative to Western development banks.

If Hong Kong is included, China isn't just the largest creditor in Laos, but in the entire world. Beijing's foreign loans dominate global markets almost to the same degree as its toys, smartphones and electric scooters do. From Kenya to Montenegro, from Ecuador to Djibouti, roads, dams and power plants are being built with billions in loans from Beijing. And all of those countries will have to pay back those loans in the years to come. With interest.

The flood of capital from China helped prevent the global economy from plunging into depression following the bankruptcy of Lehman Brothers and the ensuing financial crisis. But it isn't without controversy.

For some, the billions of dollars from China are a welcome contribution to helping many underdeveloped regions in Asia and Africa expand infrastructure. For others, the loans from Beijing have forced half the world into economic and political dependency on Beijing. Some have described the situation as "debt bondage," while a group of U.S. senators wrote a letter to Secretary of State Mike Pompeo last summer warning of China's "attempt to weaponize capital."

A Lack of Transparency

Furthermore, little is actually known about the loans. China's foreign assets are now worth $6 trillion, but outside of the government in Beijing, nobody knows much about where that money has been invested and what conditions and risks are attached. Because China doesn't completely open its books to international organizations like the World Bank and the International Monetary Fund (IMF), there is a lack of needed transparency, says IMF head Christine Lagarde.

Now, though, with the release of a new study by a German-American team of academics under the leadership of Harvard professor Carmen Reinhart, Largarde will have a clearer picture. For months, the economists dug through both known and unknown source material, compiling the most comprehensive analysis yet of Chinese foreign loans. And the image that has resulted does nothing to assuage concerns about the financial power being exerted by Beijing.

On the contrary: The data shows that many countries in the poorer regions of the world have accepted far more credit from China than previously known. And the loans frequently come with onerous conditions that are strongly oriented toward Beijing's strategic interests and increase the risk that many countries in the developing world could plunge into financial crisis. "The West still hasn't understood how profoundly China's rise has changed the international financial system," says Christoph Trebesch, a co-author of the study from the Kiel Institute for the World Economy.

Sitting in a library in Hamburg, Trebesch scrolls through hundreds of lines of data on his laptop: loan periods, interest rates, intended purposes and collateral on almost 5,000 Chinese loans and aid payments to 152 countries. The information comes from almost a dozen databases that were compiled with the help of aid organizations, banks and the CIA.

Trebesch describes the process of compiling the information as "a kind of economic archeology." The process involved him and his colleague Sebastian Horn analyzing the data and then comparing it with official sources to put together a comprehensive picture of China's foreign assets -- the kind of picture that Beijing, no doubt, would prefer to keep under wraps.

Closed Financial Loop

According to the study, China exports more capital to developing and emerging countries than all other industrialized countries put together. Moreover, numerous conditions are attached to the loans that weigh heavily on thier recipients.

Whereas Western governments and multilateral organizations generally attach low interest rates and long repayment periods to their loans, China tends to impose short periods and higher rates. To ensure that the loans are paid back, the contracts guarantee Beijing a number of rights, such as access to foodstuffs, raw materials or the profits of state-owned companies in the recipient countries. Frequently, the Chinese government directs the money straight to Chinese companies that have been contracted to build airports, ports or dams, an approach that creates a closed financial loop without the involvement of a single foreign account.

In addition, more than 75 percent of the direct aid loans provided in recent years have come from two state-run financial institutions: the Export-Import Bank of China and the China Development Bank. That means that the government is constantly informed of every phase of their aid projects and when crisis befalls creditor countries, China is well-positioned to grab its collateral ahead of other creditors. The study notes that China has developed a new form of development aid in which state loans are provided at commercial terms.

That can result in ugly conflicts when projects fail to proceed as planned. In Sri Lanka, for example, China took control of a port after the government ran into difficulties servicing its debt. In Ecuador, Beijing secured 80 percent of the country's oil revenues to compensate for the costs associated with an enormous dam project. In Zambia, which owes China an estimated $6 billion, regime critics are concerned that Beijing will take over the state energy supplier Zesco.

Fears are also growing in South Africa, where President Cyril Ramaphosa is thought to have negotiated loans and subsidies worth 370 billion rand (the equivalent of around 24 billion euros) during a state visit to Beijing last fall. The opposition party Democratic Alliance is concerned that South Africa could become mired in a debt trap and that Beijing may, for example, take control of the struggling state-owned electric utility Eskom. The South African government, Ramaphosa insisted last fall, "is not in the habit of ... handing over the assets of our country to any other country or entity." The reference was clearly to China. To be sure, Western countries are not displeased that China, in many countries of the world, has taken over the role of scapegoat that was long played by the IMF or the United States. But they are nevertheless unsettled by the lengths Beijing goes to in its effort to conceal the true extent of its loans to the developing world.

Danger of Default

The German-American study outlines the scope of that attempt. It argues that many payments from Beijing are masked because they go straight to state-owned companies operating in recipient countries. The balance sheets of those companies, though, are frequently not accounted for in official financial statistics. The result is that a large chunk of Chinese development loans is concealed from Western governments and international organizations. The study found that the amount of foreign debt held by China is around 50 percent higher than is documented by official statistics.

The discrepancy is particularly large in those countries that are already heavily indebted. In Ivory Coast, for example, debt levels are $4 billion higher than previously thought. The difference in Angola is $14 billion and in Venezuela it is $33 billion. Because the Beijing government tends to charge high interest rates, many emerging and developing countries suffer, according to the study, from "growing annual debt service obligations." That means their interest rate payments continue to rise, which increases the danger that they may ultimately default.

A train in the Kenyan coastal city of Mombasa on a new line constructed by China.
A train in the Kenyan coastal city of Mombasa on a new line constructed by China.

Study authors note that the situation is reminiscent of the late 1970s, a time when large banks from the U.S., Europe and Japan provided billions in loans to Latin American and African countries rich in commodities -- credits that flew under the radar of international monitoring agencies. When prices for many raw materials crashed, countries like Mexico could no longer service their debts and much of the developing world slid into a debt crisis that set them back for years.

Today, the situation is hardly any different. Once again, many developing countries have accepted huge loans. And once the hidden money flows from China are included, as the study shows, the debt loads being carried by many countries are again as high as they were in the 1980s. The authors write that the situation looks "strikingly similar."

Already, there are initial indications of an approaching crisis. Pakistan was recently forced to apply for an emergency IMF loan because it was no longer able to service its massive Chinese debt load. In Sierra Leone, the government stopped the construction of an airport that China had intended to finance. Meanwhile, IMF Managing Director Lagarde hardly holds a speech in which she doesn't mention the dangers facing global financial stability.

What Africa Needs

But there is no end in sight to the flow of Chinese credit. The economic advantages for China are simply too great, as are the political benefits, particularly in Africa.

Whereas the West has largely seen the continent as little more than a source of a steady stream of catastrophes, Beijing has viewed it as a place of untapped future potential. Around 1.5 million Chinese are thought to be living and working in Africa, a group that includes entrepreneurs, IT experts, technicians and merchants.

They have expanded infrastructure in Africa at an impressive pace, building dams, airports, train lines and industrial parks across the continent. In return, China has secured access to natural resources and African markets.

Beijing is delivering precisely what Africa needs, says Rwandan President Paul Kagame. He belongs to a growing number of African strongmen who are seeking to emulate the successful Chinese model of developmental autocracy, often with the support of their citizens. According to a survey conducted by the pollsters at Afrobarometer in 36 African countries, 63 percent view China's engagement in a positive light.

African rulers prefer cooperation with China in part because it isn't linked to moral stipulations like those demanded, on paper at least, by Western governments. The Chinese don't pay much attention to human rights or democratic principles and also tend to ignore environmental concerns and minimum labor standards. And they don't have too many scruples when it comes to bribing politicians.

Nevertheless, warnings that debt loads have become too high are growing louder in Africa as well. Not just because many projects have proven to be economically unviable, but also because China has been systematically underreporting its influence.

More Clarity

Whereas official Chinese government statistics often only list small loan totals, the real numbers are far higher, as the new study shows. The small country of Djibouti, for example, is carrying a Chinese debt load equivalent to 70 percent of its annual economic output. In Congo, it is 30 percent and in Kenya, 15 percent. It is vastly more than the governments owe to Western countries. Colonialism, made in China.

The situation isn't likely to change any time soon. "Many of the Chinese projects have been beneficial for the recipient countries," says Trebesch of the Kiel Institute for the World Economy. After all, many countries in Africa are in dire need of modern infrastructure.

Furthermore, some recent studies from the U.S. have painted a less alarming picture of Chinese development loans. The economist Deborah Bräutigam of Johns Hopkins University in Baltimore found that of 17 African countries stuck in a debt crisis, only three of them received loans from Beijing. The analysts from Rhodium Group, meanwhile, argue that China is not nearly as heavy-handed as many believe. In examining 40 of Beijing's projects, the institute found that the Chinese government is willing to make concessions on repayment deadlines should it become necessary.

Still, the frequency of such concessions would seem to indicate that the initial conditions imposed by China were far too strict. And the situation is a far cry from conforming to international standards of transparency regarding the size of the loans made by Beijing and the conditions attached.

That, in fact, is the primary improvement that Trabesch would like to see -- namely that China finally provide more clarity about its financial activities in the developing world. Firstly, because the economic and political consequences of the loans would become more visible. Secondly, because it could help prevent the outbreak of a new debt crisis in the developing world.

After all, China would be directly exposed were that to happen.

Deutsche is having a Lehman moment in a roaring bull market

Miserable end to investment bank venture could have been avoided

Tom Braithwaite

© Bloomberg

From a distance, Deutsche Bank’s capitulation is bizarre. Lehman Brothers failed during a full-blown financial crisis, with 26,000 employees losing their jobs. This weekend, Deutsche Bank’s sweeping restructuring of its investment bank will bring a similar level of mass redundancies — but after a decade-long bull market.

The market, political and regulatory pressure has built for years. Deutsche’s management is finally giving up. The Frankfurt bosses will rip out the heart of the US investment bank, quarantining unwanted assets in a “bad bank” and attempting to sell off whole businesses.

What is sad for 20,000 bankers and traders, compliance and support staff is good news for investors who have seen their shares fall 80 per cent in 10 years. It should be a relief, too, for the German taxpayer, who has remained the ultimate backstop for this hulking “too big to fail” institution.

Deutsche emerged from the 2008 crisis proud of having avoided a government bailout. But as whistleblowers claimed — and the Securities and Exchange Commission later confirmed — its stated balance sheet was distorted by false accounting.

After the crisis, legacy trades continued to clog the books and, in a world of higher capital requirements, Deutsche could no longer take the giant leveraged bets that used to flatter its income statement.

Was there another path? Different leaders might have helped. Some cite as a potential lost saviour Edson Mitchell, former head of securities sales and trading, who died in a plane crash in 2000. But a quote attributed to him also shows an enduring Deutsche problem: ‘If you don’t have $100m by the time you’re 40, you’re a failure.’”

The big bonuses were made in the pre-crisis years but even in today’s relative austerity, Deutsche had 643 employees earning more than €1m last year. Whatever its meagre return on equity, Deutsche usually made money for someone — just for the top staff rather than shareholders.

Some former employees suggest an earlier reckoning might have worked wonders. If Deutsche had acknowledged its dire straits and accepted massive government support, it might have wound up like Citigroup, which took $45bn of US government money in the crisis but ended up with a viable business.

Had it followed Goldman Sachs and Bank of America in accepting a restorative capital injection from Warren Buffett’s Berkshire Hathaway, things might have been different.

Instead, Deutsche used Berkshire for a series of secret derivatives trades that deferred real reform.

“The one word that would describe what took place with the US investment banks versus the European banks would be ‘capital’,” says Mike Mayo, an analyst at Wells Fargo, who once worked for Deutsche. “The larger US banks raised more capital faster and have more actively reallocated that capital than others.”

Today, Goldman Sachs, Morgan Stanley, Bank of America, Citigroup and JPMorgan Chase outperform Deutsche, Credit Suisse, UBS and Barclays. They are benefiting from their greater heft in trading. As Mr Mayo says, “Goliath is winning.”

When Deutsche retreats, “Wall Street” will be a broken synecdoche. Deutsche, at number 60, was the last investment bank in that part of Lower Manhattan. What will remain are recriminations over how Europe’s investment banking champion failed to last the distance.

Toward a Euro-Pacific Partnership

Notwithstanding the latest truce between the United States and China, the world has entered a dangerous new phase of great-power competition. Under such conditions, smaller powers such as European and Pacific-Rim countries will stand no chance of enjoying fair and open trade unless they form a united front.

Zaki Laïdi , Shumpei Takemori, Yves Tiberghien


PARIS – Thanks to the efforts of Japanese Prime Minister Shinzo Abe, the recent G20 summit in Osaka avoided the worst possible outcomes. That counts as a victory in the age of US President Donald Trump. Among other things, G20 leaders issued a final communiqué affirming the importance of free and open trade. And on the sidelines of the summit, the United States and China agreed on a trade-war armistice, while the European Union announced the signing of new free-trade agreements with Vietnam and the Mercosur bloc (Argentina, Brazil, Paraguay, and Uruguay).

Nonetheless, the underlying sources of global economic uncertainty remain. Until the Sino-American conflict is resolved, commercial and trade flows will be at risk of political disruption.

In order to avoid becoming collateral damage in the new great-power struggle, Japan, the EU, Canada, Australia, Malaysia, and many others are coming together to protect their interests and the international trade system. Each has acknowledged that the most important issues in global trade are regulatory, concerning not tariffs but investment protections, subsidies to state-owned enterprises (SOEs), intellectual-property (IP) and environmental protection, open public tendering, e-commerce, and data flows.

A recent study finds that countries in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the EU-Canada Comprehensive Economic and Trade Agreement (CETA) have already converged on most of the major regulatory issues. But as countries that largely rely on active diplomacy and soft power, they have everything to lose from a prolonged and escalating geopolitical conflict in which they would come under pressure to choose sides. To defend their interests, they must ensure that global trade is subject to objective dispute-settlement mechanisms.

A commitment to multilateralism is not an endorsement of the status quo. CPTPP and CETA member states recognize that the global trading system has problems, including incomplete or outdated rules that fail to account for issues such as subsidies to SOEs. But they also know that bilateralism – small countries trying to negotiate on equal terms with superpowers – is not an option. The answer, then, is to restore balance and trust to the multilateral trading system, by forging a new partnership between the EU and the CPTPP countries.

A Euro-Pacific Partnership between the EU and CPTPP would represent 31% of world GNP and 40% of all trade, giving it substantial leverage to establish common principles and standards for global trade. This objective is well within reach, given that the EU now has trade agreements with almost every country in the CPTPP, including Vietnam. Moreover, a new partnership would not require a new trade agreement, but merely a consolidation of existing agreements.

The reasons for forming a Euro-Pacific Partnership are as much political as economic. Those countries that remain committed to multilateralism need to send a strong message that they will defend the liberal values and institutions that other countries have abandoned or declared obsolete.

Hence, while a new partnership could start with the EU and CPTPP, it must remain open to all countries, provided they accept certain rules and principles. Membership, in turn, would serve as an insurance policy in the event of a renewed Sino-American conflict. We now know that a trade and technology war can have far-reaching consequences for the global economy. Those who insisted that protectionism was impossible in a world of global value chains were wrong.

Our proposed partnership would be based on the following 12 principles:

1. Recognition of the World Trade Organization as the central forum of the global trading system and the main platform for settling disputes.

2. The clarification, deepening, and modernization of rules in the priority areas of government subsidies, the role of SOEs, and enforcement of IP protections.

3. The development of new rules related to e-commerce and data transfer in the spirit of the Osaka Track, adopted by 24 signatories at the G20 summit to formulate a digital governance framework.

4. The guarantee that foreign investment and market access are safe, even as states retain the freedom to determine their own public policies.

5. Transparency and reciprocity in access to public procurement.

6. Compliance with the 2015 Paris climate agreement.

7. Respect for fundamental rights and freedoms, including freedom of association.

8. The possible establishment of a modernized joint dispute-settlement mechanism, in line with WTO principles.

9. Regulatory consistency between the EU and the CPTPP countries.

10. The establishment of a mechanism for regular high-level political consultations among EU and CPTPP countries.

11. The creation of working groups in all sectors where common or harmonized positions may advance member economies’ joint interests.

12. The will to build an area of peace and prosperity, free from geopolitical competition.

These principles alone will not save multilateralism. But countries still committed to that ideal must forge a new path forward. Following the G7 summit in France next month, the hope is that the EU, Japan, and Canada will endorse and define the precise modalities of a new partnership by the end of 2020. It is time for multilateralists to put their collective foot down in defense of their principles.

Zaki Laïdi is Professor of International Relations at Sciences Po.

Shumpei Takemori is Professor of Economics at Keio University in Tokyo.

Yves Tiberghien is Professor of Political Science at the University of British Columbia in Vancouver.

The Fed Rate Cut Won't Help

by: Kirk Spano
- There is a lot of focus on a potential interest rate cut, but it is of limited value to the economy and equity markets.

- Ending quantitative easing (QT) in September is of far more consequence and could fuel a rally in the U.S. and emerging markets.

- Until we enact smart fiscal policy, the economy is going to muddle along for a long time as asset bubbles develop.

- Buy a late summer correction, but be ready to sell on any negative economic developments in 2020.

The world is focused on what the Federal Reserve will do this week with interest rates. Will they cut?
If so, how much? A quarter point? A half point? It's so deliciously breathless. And it probably doesn't matter much.
The Three Stooges: LIRP, ZIRP and NIRP
Seriously, whether it is low interest rate policy, zero interest rate policy or negative interest rate policy, none of these were ever meant to be forever policies. Unless of course, you ask Ben Bernanke, who said he didn't expect to see normal rates again in his lifetime. For the record, Bernanke was only 60 when he said this at quarter million dollar lunches (quarter million being the fee he got) he held for big shots a few years ago.
Historically, the Fed's benchmark interest rate has been a shade under 4%. It apparently hit an 11-year peak at 2.42% this past April.
So, while the U.S. avoided Japanese and European style negative interest rates, cousin NIRP, we can't get back to normal either. Low interest rate policy is the new normal it seems. The academics decree it. The politicians are too political to make the necessary changes to fix it - and it is broken. A visit from ZIRP is not out of the question given the dysfunction.
So, the result is that the fed funds rate is about to head back down in order to avoid a recession next year. But will it help much? I don't think so.
Folks Keep Forgetting About "Slow Growth Forever"
By now I thought that understanding and acceptance of the "slow growth forever" global economy would have happened. Apparently not. Let's give it the once through.
Demographics drive the economy. It always has, it always will.
When more younger people become middle class, the economy grows, nationally and globally. The American baby boom is the poster child for such economic expansions. But, what happened in several emerging markets, particularly China, in recent decades was just as big.
The financial obligations of aging demographics, mostly unfunded, are a major headwind to economic growth going forward. This is hitting the four largest economies. In order of severity: Japan, Europe, China and the U.S where we have the millennials to offset much of the coming Boomer Bust pain.
The Fed wrote a good paper about this back in 2016:
The problems of demographics on GDP growth are not unknown, just un-dealt-with.
Massive global debt is stifling borrowing and business development. Monetary policy, quantitative easing (QE) in particular, has offset that  for now. But we are seeing the limits of easy money and the snap-back effects of the wealth inequality it creates.
Technology is also disinflationary due to the efficiencies and productivity it creates. While we are not to the "universal basic income" phase of civilization yet, we are likely to see 20% to 40% of jobs displaced by the middle of the century. If we allow it to happen, that could cause a massive depression. So far, we haven't shown any willingness to turn off the funnels to the 1%, so we might see a depression.
For more on "slow growth forever" see this article on Seeking Alpha:
Why Is Monetary Policy Losing Effectiveness
The simple answer is that by removing the hurdle rate for investing, asset bubbles form while standard of living is still not improving much for working people. At some point, the value of investments have to come back in line with what real incomes can afford.
I will throw out an anecdotal observation here. I have been looking at real estate in several cities the past year. I make pretty good money. I'm a 2-percenter. But, the amount I'd have to commit to most real estate doesn't make any sense. Why would I spend 40% of my income on a couple-thousand-square-foot home? A sensible middle class home. I'm not talking waterfront or mountain views.
Commercial real estate is even worse. Properties are bid up so high, I can't imagine that most folks could make a business work in those spaces given what the rents need to be to pay the owner's loans and taxes. I'll be writing about this more in depth in a few articles on REITs soon. The short of it, there are a lot of REITs that are going to drop 30% or more soon. One of my analysts, Dividend Sleuth, just pecked out this piece: 9 REIT Takeaways.
Stanley Druckenmiller talked about the dangers of removing the hurdle rate for investment at the Economics Club of NY:

So, lower rates are losing effectiveness and raising risks.

Quantitative Tightening Ending Is Almost QE

In September, the Fed will end quantitative tightening (QT). I discussed that the Fed should have done this a long time ago in this editor's pick: The Fed Is Making 2 Huge Mistakes
In that article, I argued that the Fed should stop raising interest rates and also not increase quantitative tightening. The would appear to be a discrepancy to what I said in the last section.
There's no contradiction.
Without QT, we could have let interest rates rise more towards normal. But, folks have some fetish with needing to reduce the Fed balance sheet. So, we have been removing $50 billion from the economy for nearly a year now.
During that period, assets have been choppy and had a significant correction. Now, with earnings likely have peaked for this cycle, we have to watch out for a rise in unemployment, especially with the trade war.
What good is $50 billion more in the economy if companies are going to tighten their belts?
That money will simply flow into secondary investment markets, i.e. the S&P 500 (SPY) and Nasdaq (QQQ).
Emerging markets also are likely to see a rebound. Coupled with more QE in Europe, another $50 billion into the financial system is likely to end up overseas. This is what was happened after the financial crisis bailouts and again from 2016-2018. See the short time lag and then symmetry of the fed funds rate to the iShares MSCI Emerging Markets ETF (EEM):
Portfolio Management Now And Soon
Right now, as I discussed in a recent asset allocation article, I am heavy in cash as I expect volatility to jump after the Fed and China trade announcements. Also, earnings are showing all the telltale signs of having peaked. The Shiller PE ratio suddenly starts to gain importance.
That said, with the end of QT in September, I can see a big rally in the fourth quarter. The added money - actually, not subtracted money that has the impact of added money - to the financial system can drive asset prices up substantially, à la QE. So, I will be a buyer of QQQ on any summer correction.
Why QQQ over SPY? The secular trends are with the tech, biotech and consumer heavy QQQ.
Here's the visual:
Portfolio Management Now And Soon
Right now, as I discussed in a recent asset allocation article, I am heavy in cash as I expect volatility to jump after the Fed and China trade announcements. Also, earnings are showing all the telltale signs of having peaked. The Shiller PE ratio suddenly starts to gain importance.
That said, with the end of QT in September, I can see a big rally in the fourth quarter. The added money - actually, not subtracted money that has the impact of added money - to the financial system can drive asset prices up substantially, à la QE. So, I will be a buyer of QQQ on any summer correction.
Why QQQ over SPY? The secular trends are with the tech, biotech and consumer heavy QQQ. Here's the visual:
QQQ vs SPY Total Return

That chart includes the dot-com bust. Here's what the last decade looks like:
QQQ vs SPY Total Return 10 years
What to watch out for in 2020 is any slowing of the global economy. If companies are forced to start laying people off, that will resonate through the equity markets with force.
There's nothing worse for equities than people losing their jobs and cashing in retirement plans to pay for living expenses before retirement.
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