Four days before the Brexit vote, I wrote about how strange it was to see Germany’s 10-year bond yield go negative at the same time as U.S. equities were just 2.5% off their all-time highs.

Well, last week U.S. equity indices broke through those highs, and interest rates have gone even lower. Germany actually issued a Bund at a negative yield. On July 8, as the U.S. reported the creation of almost 300,000 jobs in June, the 10-year U.S. Treasury yield, paradoxically, fell to an all-time low of just under 1.36% and in the Netherlands the 10-year yield slipped below zero for the first time in 500 years.

We’ve all become somewhat used to bad news in the economy translating into good news for equities, as investors anticipate that rates will be kept low and unconventional monetary stimulus will be maintained. This seems to have reached a new pitch of intensity following Brexit, however. It truly feels as though the world has been turned upside down—politically as well as economically.

Politicians Have a Pro-Growth Role to Play
Indeed, should the U.K.’s referendum prove a lastingly important moment for the global economy, it may be because it marked the point at which the political overtook the fundamental as the primary driver of economic and monetary policy. Central banks seem to be running out of ammunition, but politicians haven’t appeared to care until now. When voters start delivering painful election results, however, it becomes much more difficult for them to ignore the role they have to play in growth and job creation.

Much attention has been directed at the dangers of populism, particularly of the anti-trade and anti-immigrant kinds. But there is also the potential for today’s political energies to be translated into pro-growth policies.

Brad Tank floated a similar suggestion last week. Riskier assets recovered from Brexit thanks to reassuring words from central banks, he observed. But one of the few tools they have left is “helicopter money”—putting new money directly into the hands of consumers, or using new money to finance fiscal spending. Implementing that requires government cooperation, Brad noted, which might in turn move governments toward structural reform of things like tax codes and regulation, possibly starting in Japan.

Infrastructure Spending Could Be on the Agenda
Politics may simply be too polarized for that. What we might see, however, is some momentum behind the idea that central bank stimulus should be augmented with fiscal stimulus, particularly infrastructure spending. Both left and right can get behind that because it’s good for jobs and business.

We have now seen Japanese Prime Minister Shinzo Abe’s ruling coalition consolidate its position after last weekend’s elections. Abe took this as a mandate to “accelerate Abenomics,” and there has been widespread speculation about a stimulus package worth perhaps 2%-4% of GDP. Japanese equities rallied in response.

Similarly, in the U.K. Brexit has been followed by the surprisingly quick succession of Prime Minister Theresa May and her new cabinet, also eager to test its mandate. While May has appointed a somewhat hawkish chancellor, her own rhetoric marks a significant shift away from the austerity associated with the Cameron-Osborne administration.

Obstacles Remain but Momentum Is Building
There is a long way to go before we see realization of fiscal stimulus—and even longer before we can speak of a globally coordinated infrastructure spending program. Could we see such a thing in the U.S., for example? The need is clear enough. But to my mind, this initiative would be in danger of getting caught up with other political footballs, such as corporate tax reform. The likelihood of an infrastructure deal being done will depend on a number of factors, such as control of Congress and the White House, and the state of the economy: The more unified the political control and the worse the economy is doing, the more likely we are to see a deal.  

What might this mean for corporate earnings? We’ve been concerned about this through a number of our CIO Perspectives, thinking about the catalysts that might end the current earnings recession. Firmer oil prices, a weaker dollar and some stability out of China helped set the foundations. Concerted action on infrastructure spending would certainly build upon them. And while these are early days and big obstacles remain, voters may be reminding governments that they cannot leave the business of growth and job creation to central banks alone.

Neuberger Berman’s CIO insight by Joe Amato