From Reflation To Redistribution: The "War On Inequality" Looms

The bigger picture narrative, according to BofAML's Michael Hartnett, is that the policy baton is passing from Monetary to Fiscal stimulus in 2016/17. Simply put, central bank rate cuts are ending; and new policies to address the populist desire for a "War on Inequality" are emerging. This 'fiscal flip' - as Hartnett describes it - means rotation from 'deflation' to 'inflation' assets... from 'financial' to 'real' assets.

Broadly, this new policy response is likely to be a combination of:

Redistribution...stagflationary: winners - TIPS, munis, low-end consumption (retail, payments, tax services); losers - brokers, luxury, growth stocks; yield curve bear flattens;


Protectionism...deflationary: winners - government bonds, gold, volatility, high quality defensive stocks; losers - banks, multinational companies; yield curve bull flattens;


Keynesianism...reflationary (with “helicopter money): winners - TIPS, commodities, banks, value; losers - bond substitutes; yield curve bear steepens.

The table below shows specific winners and losers contingent on each policy theme...

Happily, the fiscal flip this summer has thus far been more biased toward redistribution & Keynesianism rather than protectionism. For example:

In Japan Abe has hinted at an economic package at the upper end of the ¥20-30tn range with ¥13tn in fiscal measures, possibly to include 3% min. wage hike and ¥15,000 cash to low income earners;


In Europe the growth of government spending has accelerated back to its pre-Global Financial Crisis pace, adding >1% to GDP growth in 2016 (note a newly permissive ECB cancelled Spanish & Portuguese fiscal rule-breach fines in the past month);


And in the US both presidential candidates are touting infrastructure spending packages (Clinton proposes $275 billion in infrastructure spending over five years; Trump has also proposed tax cuts, infrastructure & health spending. Note Ethan Harris argues that in coming years fiscal policy is likely to become more effective than monetary policy.

We are convinced that the flip from monetary to fiscal policy will drive asset allocation & asset prices in coming quarters. Fiscal flip reflects policy intent to reduce deflation, wealth inequality, wage insecurity. Success means rotation from “deflation” to “inflation” assets.

Note that real assets (commodities, collectables & real estate) now at all-time lows relative to financial assets (stocks & bonds)...


So what will you be buying?