Markets: The accidental strategist

UBS interest rates strategist Matthew Johnson is an unabashed fan of Fed Chairman Ben Bernanke, saying he saved the world from another Great Depression.

If Matthew Johnson ever met Ben Bernanke, he would want to ask the Federal Reserve Chairman where he thought he went wrong during his time as the world’s most influential central banker.

Johnson, the 33-year old patrician-looking UBS interest rates strategist, is, unlike many in financial markets, an unabashed fan of the former Princeton University professor who may yet return to teaching.

“He seems a humble guy so I’d like to ask what mistakes he thought he made during his tenure,” says Johnson.

Plenty, say many of Johnson’s peers who work in the world’s biggest investment banks, asset management companies or in the academic community. They are caustic in their criticism of the Fed chairman’s policy of quantitative easing, buying large quantities of Treasury and mortgage-backed securities to accelerate economic growth.

QE, as it is commonly referred to, has created the preconditions for an inflation tornado and undermined the world’s reserve currency, the US dollar, Bernanke’s critics say. Tellingly, in a survey a few years ago, Johnson says Warren Buffett came out as the man most admired after Lehman Brothers’ 2008 bankruptcy because the Sage of Omaha bought shares following the collapse in financial markets. Bernanke came in third or fourth, Johnson remembers.

“Buffett wouldn’t have been seen as clever buying shares if it wasn’t for Bernanke,” says Johnson over a beer at a pub in Sydney’s Surry Hills. “It was fortunate that in 2008 the Fed had a chairman who was the world’s foremost specialist on the Great Depression of the 1930s.”

Johnson, born to a medical secretary mother and a tradesman father who became an engineer, wanted to follow his hero into academia. He embarked on a PhD at the University of Newcastle in 2001 after finishing an honors degree in economics.

But the then 24-year-old found himself facing three years of research and writing in order to get his doctorate. Johnson realised he was perhaps “too young for it” .

“Friends were moving past me. Their lives seemed good. They had jobs. Mine seemed impossible,” says Johnson.

He got a job with the Productivity Commission doing micro economic research on cost-benefit analysis of government regulation. He was later given big picture projects including one on the benefits of government grants for research and development.

Then cycling home one evening, he broke both arms in an accident. His mother had to come to Canberra to take him home to Newcastle so he wouldn’t starve. It was during his two months convalescing that Johnson decided to try and get a job in the private sector. He started work for Forecast, as an economist and market strategist but then wanted to get closer to the action and left to join ICAP, an inter dealer broker.

“Previously I had never seen how transactions were put together and I sat in the middle of the trading floor surrounded by all this activity,” says Johnson. “It was wonderful.”

Despite having a desk in the middle of the trading floor, Johnson felt ICAP was akin to being on a hill looking down on the activity in the valleys. He wanted to get amongst it and got a job in 2008 at UBS, Australia’s leading investment bank.   

When he joined UBS Johnson says he was a “conventional” in his thinking about markets and the economy. That meant he had faith in theories that viewed markets as efficient and that the government should stay out of them.

Now Johnson says he is a “reluctant Keynesian”. Events since September 2008 have clearly had an impact on his view of the world, particularly the response of a policy maker such as Bernanke.

The Reserve Bank of Australia’s monetary policy, says Johnson, was “over tight during the last few years of the mining boom”. The RBA underestimated the damage of the effect of very strong Australian dollar.

The RBA was also “too slow to cut interest rates” once it was clear that the mining boom was over as the Chinese economy slowed, says Johnson. Unemployment is trending up and inflation is below target. That’s not a good result for the RBA, he says.

Meanwhile, successive governments have been seduced by temporary revenue gains from the previously voracious demand for commodities from China, not willing to accept that such a windfall was temporary. As a result Australia’s deficit is larger than it appears, says Johnson. He estimates that the structural deficit is around 4 per cent of gross domestic product.

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