SIMON BROWN: I’m now chatting with Dr Adrian Saville. He’s, of course, the chief executive at Cannon Asset Management. Adrian, good morning. I really appreciate your time this morning.
Joe Biden is being sworn in as US President in about 12 hours’ time. Yesterday we started with the confirmation speeches for his cabinet. Janet Yellen is the one I was most interested in. The odd tweak there is, of course, she was Federal Reserve chair, and now she’s Treasury secretary. That’s similar to what we’ve got with Minister (Tito) Mboweni, who was in charge of our Reserve Bank, and then, as he always says, stepped down to National Treasury. Is it a fair point to say that, because she was at Federal Reserve, she’s a bit of a known entity? Or are these jobs just so widely apart that there’s still a lot to find out about how she will be?
ADRIAN SAVILLE: Morning, Simon. Good to be with you. I think it’s fair to say she’s somewhat of a known entity. But of course, she’s about to shift from a known environment, in which she’s been a very transparent, clear-communicating, level-headed reserve banker, into a holder of the public purse, with political association or affiliation. They’re both financial roles; they’re both working with money and numbers and figures, and are key policy implementers. But reserve bankers, by their nature or by institutional design, are expected to have a high degree of political immunity and to be non-partisan, so it is without question a change in role. But the positive we’ve got in that circumstance is that we do know how she operates.
SIMON BROWN: And what we’re going to get. I take your point. Central bank leaders are fiercely independent and in a sense do report to no one except the population, the country, whereas, as treasury secretary, in essence, she has a boss, and that boss is going to be President Biden and she will be implementing his policies, such as the $1.9 trillion proposed stimulus.
ADRIAN SAVILLE: I think in her working world, things are about to become a whole lot more political, which will be a different environment. That $1.9 trillion package that you reference is a key lever in US policy. The US has under-invested in infrastructure for decades. And so this is an important policy lever. Infrastructure spend by its very nature, has important spill-overs and linkages and multipliers. You can think back to the very famous New Deal of the 1930s as the inspiration for infrastructure spend everywhere over the last 100 years. And that $2 trillion package is substantial. It’s a significant spend, amounting to about 15% of GDP.
SIMON BROWN: She was talking a lot around that infrastructure yesterday …. and, absolutely, the US needs it and hasn’t seen anything, as you say, in almost 90 years.
The other thing which really struck me was her take on climate change – again a huge difference from the Trump administration. She was talking about electric vehicles as one of the solutions to climate change. You get a sense that she’s going to be a much more friendly – of course, her boss President Biden – treasury secretary towards climate, which again will have a marked shift from what we’ve seen under Trump, and to a degree even under Obama, perhaps, because circumstances have changed.
ADRIAN SAVILLE: Yes. There are some very important policy shifts, and we flagged this. We’ve identified this in our investment process as changing some of the needles of market direction: climate change being one, global international relations and collaboration being another. And if you put infrastructure spend into that same part, although over the course of the Trump administration spending has hiked steadily, and the deficit has grown from big to absolutely yawning.
The 2020 deficit sits at just over $3 trillion, which is the biggest we’ve seen since World War II. And that adds to a significant debt-to-GDP ratio. The US debt-to-GDP ratio sits now in the order of 130%, which is off the charts.
Economics One textbooks will tell you that’s a default looking for a place to happen. Of course, it’s US dollar-backed, which means it’s an entirely different conversation.
But Janet Yellen comes in part in I think to substantially change policy direction and policy narrative in the same breath. She steps into an environment which is overspending, over-indebted and under-funded.
SIMON BROWN: Yes. And 130%, as you say – Economics 101 – that really is a case of you are bankrupt. In the US a different game – but 130%!
We’ll leave it there. Dr Adrian Saville is chief executive of Cannon Asset Management. Adrian, I appreciate the very early morning, sir.