“Moderation is a virtue only in those who are thought to have an alternative,” so says Henry Kissinger. Perhaps it is this thought that some global central banks took to heart in recent years.
Looking back on “successful” monetary policy, it has been those central bankers willing to unleash tremendous amounts of liquidity who witnessed recovery after the financial crisis. The product of their immoderacy is trumpeted by exceptionally low fixed income yields – whether nominal or real (after inflation).
Interesting to note that the outcome of their actions has been the very definition of moderate…so far. Economic growth, job gains, wage growth, and inflation have been tepid but are recovering. Even the unrelenting pace of equity returns these past five years (18.8%) seems far more moderate when put in the context of the cycle (trailing 10-year return of 7.8%).
The most recent condition to moderate is volatility. As the fear of the next crisis has faded, so have the wild swings in emotion and asset prices. Equity investors waiting for a pullback in prices to deploy capital have been frustrated by shallow and infrequent dips over the past few years. Such calm can often obscure risk.
More moderation is what is needed to sustain the economic recovery. As we continue through our economic cycle, policy makers must tailor their programs to avoid letting momentum carry us too far. As investors we must remain vigilant to the fact that circumstances change and unexpected events happen. We at Edge remain disciplined in retesting the fundamental underpinnings of our core investment themes and the valuations that are available. This work enables confident action should our world turn immoderate.