Don’t you want...a balloon
—Pennywise, the Dancing Clown (IT, 1986)
We know Halloween is approaching when the sightings of “killer clowns” are increasing. The media is talking about a craze and recent reports suggest these creepy fellows have scared people in Australia, the Netherlands, the UK, the US, and other countries.
Ordinary clowns love parties. They blow up balloons, make a fool of themselves, and share jokes. But there’s nothing funny about killer clowns. Once they have revealed their true nature, they frighten people, create mayhem, and spread sorrow.
As investors, we have enjoyed our own party for a while now, with some clowns blowing bubbly balloons and others handing out monetary sweeties. Question is, do we know what type of clowns we are dealing with? A few are now threatening to take the punchbowl away. What if, next, they take out the knives to pop the balloons? And what about those weird costumes?
The myth of the killer (or evil) clown has a long history, dating back to at least the nineteenth century. Apart from Stephen King’s Pennywise, modern culture has produced a number of exemplary specimens, including the Joker in the Batman movies. It is their “double-faced” trickery—doing evil while appearing jolly—that instills an archetypal fear.1
More broadly, this craze reflects the current Zeitgeist, which is characterized by social anxiety and global “stranger danger”. Apart from hideous acts of terrorism, cyberwarfare and growing geopolitical tensions (e.g. between Russia and the US), Brexit and the various upcoming elections create uncertainty and an atmosphere of fear.
The US presidential election, for example, would have been laughable, if it wasn’t that scary (if only because it basically is a vote between two doubtful candidates). The political circus in general spawns weird clowns, some with blue, others with red noses. Along the full “color-spectrum”, you have politicians like Beppe Grillo in Italy, Jeremy Corbyn in the UK, or Rodrigo Duterte, the new Philippine president, who is taking the role of killer clown quite literally. Regardless of their different face paints, they almost all have dubious fiscal and monetary tricks up their sleeves when they promise to take the fear away and “make things better”.
Whereas Stephen King brought us Pennywise, the UK has Poundfoolish clowns. It was noticeable during the referendum campaign that a number of them either tempted voters with unlimited cake or frightened them with scaremongering. In fairness, and talking about ballooning, those presently running the show are overseeing a UK current deficit that is expected to reach 6% of GDP, the world’s second largest after Columbia. Let’s just say that “tension is building” (chart 1), most clearly reflected in the recent drops in the pound that risk the build-up of (unwanted) inflationary pressures.
Chart 1
Source: Bloomberg
As investors, we are faced with our own horror stories. The legacy of the Great recession is the same as what started it: too much debt (see chart 2). That qualification is based on the level of growth with which the debt is serviced. Currently, this is too low and there are both structural and cyclical causes for this. As I explained elsewhere, this story will turn nasty when inflation starts to structurally exceed that growth, i.e. lead to stagflation.
Chart 2
In the meantime, we continue to operate under the spell2 of monetary clowns. Among their characteristics is a “permanent smile”, similar to the Joker.
They exude an optimism and cheerfulness under all circumstances, in order to maintain trust. For example, Mario Draghi’s “whatever it takes” statement suggests an ongoing, unconditional joy of support for the euro. That his policies inflict pain on savers and pensioners and even jeopardize the business model of banks and insurers is seen as the sacrifice for the greater good. Still, the most recent minutes of the US Fed indicate that its members worry about their “credibility” if they continue to delay a rate hike. Some of their policies are at risk of being exposed as epiphenomenal. In other words, they are afraid that one child at our party will yell “They aren’t wearing any costumes at all”. Monetary clowns without clothes. Now that is scary!
To conclude, these are indeed scary times for the global economy. The important point is that the current fear, reflected in low spending by consumers or corporations, has deep roots. Others have highlighted this, albeit in different terms (e.g. dread risk; Haldane, 2015). It is intertwined with societal movements, of which the anti-establishment/globalization trend comes closest to home. It could turn our party into a horrible Halloween version. The response by the monetary clowns is eagerly awaited. For the remainder of the year, I expect the Japanese and European clowns to admit that their supply of sweets has run out, while those in the US will take one of the punch bowls away (unless it starts to freeze outside).
In any case, parties that go on for too long usually end badly. Particularly when the larger neighborhood was excluded, those attending binged on unhealthy food and drinks, and the clowns start wielding knives to pop things. Still want that balloon?
Footnotes:
1 Archetypal points to the subliminal and uniform nature of the fear: it scares kids and adults alike, across all cultures and generations. The associated psychology originates in the tension between opposing forces, specifically when there is a conjunction of opposites. In market terms, for example, think of a risk-free asset that turns volatile. Or natural volatility that is artificially repressed.
2 Paul Volcker, former chairman of the Federal Reserve, called it “mystique” (Mervyn King, 2016; The End of Alchemy; p. 175).
