For Aitken, the lingering lesson was the power of the combination of fiscal and monetary support.
“A huge mistake occurred in 2009 in the form of the self-inflicted European sovereign debt crisis and Tea Party madness. Fiscal policy was halted far too soon.”
This is why, he says, the comparisons with 2009 are wrong.
“It has nothing to do with the 2009 playbook. The recovery has already been so much faster than anyone, including central bankers, could have ever imagined.”
In response to the latest crisis, central banks experimented with so-called “contingent to government” forward guidance, pledging to keep rates low until certain expected economic outcomes materialize.
Now, he says, Australia is leading the way in what might be called “contingent government fiscal policy” in which support is maintained until unemployment has fallen well below 6. percent.
It is as “powerful as the tax guidelines can be” and will serve Australia well on the road to full employment, and because it deals with the problem of what he describes as “the brutality of the Chinese Communist Party” .
Aitken has for many years been forthright in his views to clients about the “CCP’s misconduct.”
Reflation trade
Another point to remember is how the stock markets are once again the domain of the macro trader.
Part of it stems from necessity. Central banks have signaled that there will not be much action on short-term interest rates, and this has “damaged the machine room of profit for many macro-traders.”
“You are going to have to look elsewhere to realize the benefits your customers expect from you.”
And it is therefore a return to the future for macro-hedge funds. George Soros and Paul Tudor Jones have often used the sharing market to bet on their big picture.
According to Aitken, energy stocks may be the best bet on the continued recovery and reflation of the global economy in 2021.
And this despite two counter-forces: an increased influence of environmental, social and governance mandates that divert funds from the big oil companies, and the Biden administration’s proposal to move away from fossil fuels.
“Frankly, transit to the sunny highlands of climate nirvana requires a lot of oil,” he says.
So what happened to the vigilantes of the bond market?
The term was coined to describe the disciplinary forces exerted by the bond market to ward off fiscal debauchery, by increasing borrowing costs.
Aitken believes their last hurray was the tap tantrum of 2013, when then Federal Reserve Chairman Ben Bernanke triggered a disorderly rate hike by hinting at declining quantitative easing.
True permanent diet changes are extremely rare.
– James Aitken, Aitken advisers
The brutal sale of bonds in March, as markets panicked, had nothing to do with vigilantism and everything to do with “sheer plumbing of the US Treasury market”.
The bond and equity markets are still not positioning themselves for a recovery. Traders have just hedged the cyclical and momentum shorts, but are not yet ready to part with tech stocks that have seen such a strong run.
Fighting the Fed, and by extension other central banks, remains both dangerous and foolish, he admits. If anything, central banks are showing a willingness to do more. The Fed is expected to maintain its extraordinary pace of asset purchases until maximum employment is reached.
And the Fed and Reserve Bank made a big change by tying future policy to actual and unanticipated results.
This, says Aitken, is “extremely accommodating”, with a lot of room for maneuver still evident in the labor markets. Bond bulls were also encouraged by the impending appointment of Bernanke’s successor Janet Yellen as Biden’s treasury secretary.
Dr Yellen is “smart, intelligent, collegial and savvy,” but Aitken says it’s premature to project how she might act. “That doesn’t automatically mean everything will be amplified, but it does mean the tailwinds of reflation will stay in place.”
Boom time
The bond market is not immune to future calamities and is facing a number of tests from 2021. The first will come in the form of a rise in inflation while the base effects will show up. March to May.
With inflation rates likely to print at levels comfortably above the central bank’s targets, even if based on low 2020 numbers, this could scare some investors into believing that a sustained inflationary breakout. is on its way.
The other test will be the possible decline in fiscal and monetary support, especially if the economy is too hot. “There is a growing chance that this extraordinary stimulus will work better than anyone imagined,” says Aitken. “Getting away from the tip” could prove very problematic.
For now, we are still in a difficult period. Although jobs have been replenished much faster than previously believed, employment is still well below pre-pandemic levels. The recovery, spectacular as it is, has been uneven.
But to use a statistical term, big tail risks now exist on both sides. And if a vaccine is rolled out, 2021 could be one for the ages.
“It doesn’t take too much imagination to think that next year’s Northern Hemisphere summer will be an absolute boom, unlike anything we’ve seen in years.
“The pent-up demand could be immense and investors need to stay focused on it.”
Diet changes
This year he has engaged more than ever with his clients, some of the biggest names in the macroeconomic and global investment community. It is also the one where he missed Australia the most.
From the narrow world of markets, “this is an amazing time to be an investor.”
“If you imagine that interest rates are going to stay broadly low or stable over the next few years, the only risk premium to harvest is the equity risk premium,” he says.
While opportunities abound, Aitken is cautious and betting that the post-pandemic world will be materially different from what existed around this time last year.
Some trends have accelerated, such as the migration to online shopping and the adoption of telemedicine, but “the financial and economic story is clear.”
“Real permanent diet changes are extremely rare.”