What do you do when the necessary is impossible? Rethink the impossible.  

The three levers of government public policy are monetary, fiscal, and structural policy. At present, only one is functioning at a level that remotely resembles normality: monetary policy. Yet, I would argue that central bankers exercising their monetary policy has now gone way beyond their core mandate and have, in effect, become enablers of bad behavior of others. Allow me to explain.

In discussing the current and recent economic condition as it relates to the three stooges, Nouriel Roubini writes, “…the policy mix was suboptimal. While monetary policy can play an important role in boosting growth and inflation, structural policies are needed to increase potential growth and keep firms, households, banks, and government from turning into zombies, chronically unable to spend because of too much debt. And fiscal policies were also necessary to support aggregate demand.” Mr. Roubini goes on to state, “…in view of persistent lackluster growth and deflation risk in most advanced economies, monetary policymakers will have to continue their lonely fight with a new set of “unconventional unconventional” monetary policies.”¹

In making such an argument, Mr. Roubini is excluding the fact that such actions have a major consequence: It gives those who are responsible for pulling the other levers of government intervention – they being fiscal and structural – a pass. This is wrong. By continuing to embrace extraordinary monetary policies and succumb to the fears and spasms of the financial markets, central bankers around the world are now acting as an enabler.

If you look up the definition of enabler, the first definition is this: “a person or thing that makes something possible”. However, it is the second definition that more correctly applies to current central banker actions” “a person who encourages or enables negative or self-destructive behavior in another”.

As it relates to the current situation, the quote by Jean-Claude Juncker, President of the European Commission in last week’s report hits this spot on: “We all know what to do; we just don't know how to get re-elected after we’ve done it!”. For elected officials this is unacceptable thinking and behavior. When one who is in a position of power and responsibility places their personal interests above the greater good, their profiles-in-cowardice take market fundamentalism’s core principle – “the best interests in a given society are achieved by allowing its participants to pursue their own financial self-interest with no restraint or regulatory oversight”² – to an absurd height. Which then forces the conclusion that current central bank policies are monetary activism run amuck.

Investment Strategy Implications

As stocks continue their thank-God-there-will-be-no-US recession-in-the-immediate-future relief rally into nosebleed valuation territory³ and professional investors continue to embrace simplistic rules of thumb – specifically, “don’t fight the Fed”⁴, the serious and continuing imbalance between supply and demand rolls on. And, as numerous well accomplished economic thinkers have stated over and over and over again, this cannot be accomplished via monetary policy alone.

By moving into an expanded view of their mandate, central bankers are, in the process, acting as enablers for others whose job is to put their personal interests aside and make the hard the decisions. And conclusions reached by Mr. Roubini are simply flat out wrong. Central bankers should not “continue their lonely fight”, for to do so is to function as one who “encourages or enables negative or self-destructive behavior in another”, with the other being the very individuals who were chosen to do so: the elected officials: the very ones who can make the impossible possible.

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¹ ”Unconventional Monetary Policy on Stilts”

² https://en.wikipedia.org/wiki/Market_fundamentalism

³ Historical GAAP trailing 12-month P/E for the S&P 500 is 16. Current trailing 12-month P/E is above 24 (see next page)

⁴ A rule that applies to a time long past