- The reflation narrative is in full swing, with the sharp increase in bond yields signaling the markets’ belief that vaccination programs will soon bring the pandemic to an end and release pent-up demand. According to the consensus view, this, combined with abundant stimulus spending (a mammoth 13% of GDP in the US), will pave the way for a sharp recovery, boosting economic growth globally and bringing with it fears about inflation.
- We concur with Pimco’s CEO view of an “inflation head fake”: bond yields are increasing now because of misplaced concerns about inflation. Saving rates have spiked and the pent-up demand from those households sitting on positive cash balances thanks to maintained incomes and low spending could fan inflation. However, this is unlikely to last because structural trends are disinflationary. Two stand out: (1) technology – deflationary by nature, (2) a shortage of “good jobs” (i.e. decently paid and stable) that tech is set to exacerbate further.
- Central bankers and policy-makers still think that the risks of doing too little exceed those of doing too much; hence their support for continued accommodative policies. The Fed chairman made it clear why (the Fed has a dual mandate but what is true for the US is also true for much of the rest of the world): “the economy is a long way from our employment and inflation goals, and it is likely to take some time for substantial further progress to be achieved.”
- Are central bankers heeding something about unemployment that the markets aren’t? Three things concern them most. (1) In the US, both the Fed chair and the Treasury secretary put the real rate at 10%+ (not the official 6.3%) and worry about the labor force participation rate being at its lowest level since 1975; (2) In most high-income countries, layoffs in small businesses – that provide jobs for more than 50% of the total workforce – will increase (potentially 2.6m workers in the UK alone), causing lasting economic scars, (3) globally, COVID-induced learning losses will entail long-term economic costs. Put in the simplest possible terms: lower test scores mean lower individual earnings, which in turn means lower economic growth.
- The timing of the ‘end of COVID’ will be a determining factor in the strength of the recovery. In the UK, the OECD country whose vaccine rollout is so far the most advanced, the PM’s roadmap expresses the hope that if all goes to plan, June will see a ‘return to normal’. For reasons on which we expand in COVID-19: The Great Reset, the idea of a return to a pre-COVID ‘normal’ is a fallacy. The post-COVID era will inevitably differ in many significant ways – travel, work, role of tech, consumer habits: nothing will be the same. The ‘normal’ to which the British PM refers is defined in terms of normal access to restaurants, museums, theatres, concerts, sports and other events. That this normal access then equates to normal levels of activity is not a given. At best this suggests that the World won’t return to ‘normal’ before the Summer – what that ‘normal’ will look like remains to be seen.
- An online backlash erupted in Singapore after it emerged that the police abused the contact tracing system deployed to fight COVID (it made use of data for a criminal investigation despite assurances by the government that such a thing would never happen). This is not anecdotal: privacy is receding globally, the same is true for civil liberties curtailed during the pandemic. As cities become ‘smart’ and population control enabled by technology more effective, the productivity / efficiency gap between democracies and autocracies will close. It might even tilt in favor of autocracies.
- Freezing temperatures in Texas and abnormally high ones in the mountain resort of Chamonix (Monthly Barometer’s hometown) are two examples among many of global ‘weirding’ – an expression coined to illustrate the fact that climate change and global warming entail a plethora of weird phenomena that are progressively becoming the norm (the frequency of extreme weather events no longer corresponds to once-in-a-100 years but rather to every now and then). In such a context, the series of cascading failures that affected Texas’ electricity grid illustrates why resilience (which comes with costs) has to be prioritized over short-term profit maximization and that tech preparedness is paramount.
- Europe is leading in green energy. The continent is forging ahead with the challenge (worth $12tr according to some sources) to substitute fossil fuels with green energy. The formidable acceleration of green energy – about to become global – will entail two major consequences. (1) Countries that cling to the past will fall behind, triggering abrupt geopolitical fractures. The clean energy transition will redraw energy politics, giving nations that embrace ‘green’ a financial and political edge while eroding the power and leverage of the fossil-fuel nations like the Middle East or Russia. (2) Transitioning to green could be the source of optimism so badly needed for growth. From an economic viewpoint, positive expectations are the key determinant of decisions to invest (like in a house, a project, a family, or education). Expectations often become self-fulfilling, with the result that feeling optimistic about the future can ultimately hasten the pace of economic growth. At a time when sentiments about the world’s future mean that hope is in short supply, addressing the greatest challenge of our times by greening our planet could be a source of both much-needed hope and solutions.
- The current excitement with Bitcoin doesn’t sit well with Ms. Yellen’s dismissive remarks, calling it “an extremely inefficient way of conducting transactions”. Bitcoin consumes an inordinate amount of energy – the higher its price, the greater the energy it consumes –one Bitcoin transaction has currently the carbon footprint of 700,000 Visa ones. As it can hardly migrate to renewable power sources, its ‘green unsustainability’ may soon constrain it. Meanwhile, in the realm of digital currencies, China is forging ahead to such an extent that it could take the lead in financial technological innovation. A Chinese central bank official asserts this is part of the “next war”, putting it on par with the country’s progress in AI, robotics and big data. The Inside Track March 2021
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Inside Track March 2021
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