It’s time for another FTAV Q&A, as we continue to try to have interesting chats with hopefully interesting people doing hopefully interesting things in and around finance, economics and business.
As Robin mentioned last week, we’re on the lookout for future victims interlocutors, so do let us know in the comments if there’s someone you’d like us to speak to!
This week, we caught up with Freya Beamish, chief economist at TS Lombard and a veteran of the “FTAV has a conversation” genre. Here’s a transcript of our chat, which has been edited for clarity and length.
FTAV. Hi Freya. Let’s start with a broad question. You’ve been chief economist at TS Lombard for about four years. What makes a good macroeconomist?
I think that question has to be answered in the context of the type of economy that we have right at this moment in time. Sometimes it’s going to be one type of economist that is going to excel: it might be a more monetarist-leaning economist, it might be a more Keynesian-leaning economist and that’s going to depend on the context.
Sometimes you can sort of get away with it for a while, but in today’s context, there’s just so many shocks that macroeconomic debate is leaving a very clear trace in markets. So if you’re wedded to any one type of economic dogma you are probably going to be wrong quite a lot of the time. It’s much more about picking the right model for the right moment in time.
That Muhammad Ali quote comes to mind: you win the fight not in the ring, but on the road. It’s about having a playbook.
As an outfit, TS Lombard has a tendency to refer a lot to what else is being said within the broad research world. Is that a conscious choice?
It’s really interesting that you’ve picked that up. It’s definitely a conscious choice that we are trying to understand what the debate is, how much of that debate is priced in, and which narrative is driving at this moment in time.
I’ll bring it back to what I think is the most important economic concept that is shifting — and therefore where people are most likely to be either proven right or wrong over short time periods. That is the bond/equity correlation, which in turn is a function of the type of shock that is hitting the economy.
A lot of us are used to a very demand-led story where there aren’t so many negative supply shocks. And in fact, for most of my career we’ve been living under this positive supply shock of the demographic dividend that has been provided by hyperglobalisation. And now that’s reversing.
Do you think a conscious consideration of wider debates makes you more likely to be a contrarian?
There’s actually a very strong role for the contrarian in this environment. People are taking such extreme views because we’re essentially at an inflection point. Nobody has a crystal ball, nobody knows what the ultimate truth is, but that debate is playing out literally month-by-month in markets.
So if you can — especially if you’re a sort of a shorter-term enough investor — get ahead of that and see what the triggers are, identify when there might be a sort of a fragile narrative coming into the market, you can play both that fragile narrative and play the invalidation of that fragile narrative on the other side.
One of the big market stories at the moment is gold. A big narrative driving gold investors is an almost-millenarian notion that we’re approaching a moment of huge fiscal adjustment, and a major shift in the way governments approach spending. Do you agree? And what does it say about the world that these arguments are becoming so prominent?
Even though in general I don’t worry as much about fiscal sustainability as a lot of investors do, I do think gold has staying power. I think we’re seeing a genuine shift away from the dollar as central to the global financial system, to instead a multi-polar financial system as it pertains to currencies.
That’s reflective of the shift from a unipolar to multi-polar global order, simply because there’s a demand for a non-dollar by countries that are afraid of being sanctioned after the experience of Russia.
And at a deeper level, the reason why people have wanted to hold the dollar is because of its strong risk-adjusted returns. That risk adjustment is very much a function of the rule of law and institutions. [With Trump] people are going to want more compensation to hold these assets.
What is your approach to thinking clearly about such tricky, interconnected issues?
There’s a nimbleness argument. I have my belief about what is going to happen in the global economy over the next three, four, five years. That is fundamentally rooted in political economy rather than just, you know, correlations from the 2010s which are all pretty much out the window.
But in the current context — for one thing, even if I am right, I’m not going to be validated in markets every month of the year. And so to be useful to people and to be useful to investors, I have to say, ‘OK, well, actually what I think about the long term is just not going to be relevant this month. And it’s going to go in the opposite direction from that.’
It’s about continuously updating your priors, and having a deep grounding for your long-term belief — which, to me, is that the political economic cycle is not necessarily turning, but reaching serious limits.
You’re quite a collaborative outfit. How do you reconcile your views as a team?
The way that we stay nimble is to stay small. That does put a lot of pressure on us individually, but we structure the team so that our more junior economists are thematic. So they will go across countries and they’ll get the opportunity to work with a lot of different, more experienced people. And they’ll get the geographical basis so that as they grow they are already schooled in the global economy as an entity rather than just siloed research for each different region. So we’re very holistic and the way that we do that is to sort of stay small and develop really trusting relationships.
We like to laugh at each other as well, Dario [Perkins] and I have that kind of relationship where we can knock chunks out of each other and do it with a smile on our face. There’s a balance between having a cohesive team and also allowing for individual creativity.
So as a chief economist, I would send [a junior economist] out there and say: ‘OK, see what you come up with’. And they might notice something that I haven’t noticed, and if they convince me then we’ll have an open debate about things. And I think clients often find that process of seeing both sides of the argument quite useful.
What are the big economic trends that you expect will define the next decade or so?
My concern is that the labour share of income in the US is very historically low. Inequality has risen very rapidly at both poles of the global economy in the US and China, and has risen in other ways in other places. There’s lots of different ways of thinking about inequality.
That’s the underlying driver for a lot of the things that we are seeing. I don’t think — when we’re thinking really big picture here — I actually don’t think that democracy has entirely failed at this point in time. I think democracy was tested in the 1970s and it managed to stand up at a moment in time when labour power was too strong, and push back in favour of the power of the owners of capital essentially.
Now it’s being tested at the other end of the spectrum, at the other end the super cycle. And I think the so-called liberal left essentially neglected that group of people that has now become an electorate for populist movements. Some of the policies being prescribed I don’t find to be particularly useful in addressing the issues that specific electorate is facing. My worry is that if that electorate is not addressed and to some degree appeased, then this trend that we seem to be on in terms of testing democracy can only get worse.
I don’t find the left/right divide particularly useful at this stage in the game. I think policies are being offered from all sorts of places that could actually start to shift that social threat.
From the sublime to the ridiculous: you’re based in London, which means as well as thinking about the future of the planet you also have to think about the Bank of England. Your current call is that you think the Bank will scrap active quantitative tightening at the end of the year. Firstly, why is that? And secondly: the Bank uniquely jumped feet first into this process of active QT, despite being unsure about how it would work. Why do central bankers behave this way?
The cynical answer would just be virtue signalling, but I think there is somewhat more to it than that. I don’t buy all this stuff about, ‘Oh, we need to contract the balance sheet so that we have space to expand it again in future’. In an accounting sense, that’s just not how it works.
‘Virtue signalling’ is an interesting phrase to use in the context of macroeconomic policy. What virtue are they signalling?
A clean balance sheet and not being too involved in markets, and I do hold some sympathy for that. Moving away from [quantitative easing] was, I think, important. But going to the extent of sticking its neck out with active QT wasn’t necessary, and has probably contributed to the underperformance of gilts.
Should the Bank of England even care if QT is having non-disorderly effects on the gilt market?
Gilt yields should be reflective of the real economy to as much of an extent as possible. In Japan, the [Japanese government bond] yield has been useless in terms of actually playing the role that government debt should play in the real economy. So it’s not just that I don’t think that they should do too much QT, it’s also that I didn’t think they should not do too much QE. And maybe central banks have relied too much on balance sheets in both directions.
Let’s talk about the pandemic. We’re five years on from the start of Covid-19’s economic impact, and we’re still seeing its effects on the economic cycle. When people look back at this period in economic history, how do you think they’ll think about the pandemic? Was it a catalyst for changes that were already occurring, or did it completely change things?
I think it certainly catalysed some of the big trends. In some ways, it’s damaged the political repair that was starting to happen prior to Covid.
I talked about the so-called liberal left having just somewhat abdicated their responsibility for the working class in developed nations. We also need to think about central banks.
Central banks in the ’80s were sort of set up to guard against excessive power of labour, which was the necessary prescription at that moment in time. And then you had hyperglobalisation, and nobody really needed to push back against worker power in that environment, but there was still a mentality of ‘Oh my gosh, at the end of the cycle, wage growth is picking up. We mustn’t let that turn into a wage price spiral’. And actually, that’s precisely the moment in the cycle when workers are getting sort of their share of the pie, because wage growth lags the rest of the cycle.
So if you’re continuously, in every cycle, cutting off the part of the cycle where workers get their share of compensation, then the labour share of income is going to continue to decline. I think that’s part of some of the big trends that we saw in the US over the past several decades. And going into Covid, we did see some beginnings of acceptance of that. There was a lot of research coming out of the Fed suggesting that the end of the cycle is when minorities get pulled into the labour market, and that the end of the cycle is actually a really important part that shouldn’t necessarily just be cut off for fear of wage price spirals. Then they got transitory [inflation] wrong and they had to react against all of that and the whole question of are we back in the ’70s reared its head and all of those knee-jerk reactions came back with a vengeance.
It’s very sad and ironic, but before Trump’s re-election the Fed had just managed to get to the stage where it was saying, ‘Yeah, OK, let’s make sure we’re prioritising this soft landing. Let’s prioritise the labour market trends’. That was the read. And then because of the pressure that is coming out of the political establishment on to the Fed at this stage in time, they’ve had to sort of be quite standing their ground effectively and not just caving in.
So instead of a continuation of the policies that perhaps were starting to address those imbalances, then the Fed is having to concern itself with tariffs and the threat to independence — and the Republican Party and Trump then feel justified in turning around and saying, ‘You know, these guys have messed things up’.
