- Recession or not a recession? That is April’s big economic question. Has there been too much gloom? Global growth seems to be firming up, the yield curve has un-inverted, and a strong market rally has just occurred against the backdrop of a collapse in volatility. There is one reason only for the upturn: the U-turn in monetary policy. The Fed has promised that it won’t raise interest rates further, so easy (possibly perpetual?) monetary policy is now the norm around the world, however, the global economy is still losing steam. This doesn’t mean a recession is imminent, but that at best, we should expect weak demand, low growth and inflation, and extremely low interest rates.
- A case in point: the US GDP performance in Q1 is impressive (3.2% annualized), but one swallow doesn’t make a summer. An increase in inventories is the main driver, while the underlying figures like consumption point to slower economic growth ahead.
- Extremely low-interest rates tend to bid up the price of existing capital assets, particularly those with exciting narratives. Such is the case with tech IPOs. The likes of Lyft, Pinterest, Airbnb, Slack and Uber possess one commonality: they don’t make money (or barely). Uber epitomizes this situation: it is seeking a public valuation as high as USD90bn, but has never made a profit since it was founded in 2009, and last year recorded losses of USD3.3bn on USD11bn revenues. This is the power of narratives: transforming financial distress into stock market success by selling retail investors tales about the future.
- In high-income countries, the middle class is “like a boat in choppy waters.” Over the past 10 years, its earnings have stagnated or shrunk while the cost of its lifestyle has skyrocketed (particularly housing costs and often health and education). This is a tectonic shift – the economic losers are now mainstream, and no longer a marginal fringe of society. This is favouring anti-establishment and protectionist policies.
- There’s been outcry and polemics over Disney CEO’s salary last year that clocked in at a staggering 1,424 times higher than that of his median-paid employees; this coupled with an 80% increase in total compensation (to $65.6m). For the US as a whole, a large public company CEO’s salary is 254 times higher than the median salary (compared to 30 times in the 1970s). An increasing number (albeit still limited) of prominent US senior executives now recognise that less inequality and more fairness are a sine qua non if capitalism is to survive. As one of them puts it: “Given the choice between pitchforks and taxes, I’m choosing taxes.”
- Against this backdrop, it is telling that prominent American financiers (like hedge fund billionaire Ray Dalio and JP Morgan CEO Jamie Dimon) now argue that unless it reforms itself, American capitalism is heading for extinction. The question is: what price are ‘unadulterated’ capitalists willing to pay for social peace? Maybe European capitalism and its social market economies can show the way. European capitalism is, of course, imperfect – sometimes ‘lazy’ and overly cautious –; it nonetheless works better and for more people than its American cousin. It’s no coincidence that 8 out the 10 highest-ranked countries in terms of happiness are European. In these turbulent times, the European model is making a comeback.
- During the next 20 years or so, the world needs an estimated USD94tr in infrastructure – transport, energy, ICT, water… The second Belt and Road Forum that just took place in Beijing clearly shows that China is ahead in the infrastructure race for geopolitical and economic gains. Despite all the criticisms, the BRI has resulted in cooperation agreements with 125 countries and already attracted 80 countries. The recent ‘policy refresh’ in its implementation means that going forward, it will be more internationalised and open to investment from other countries.
- No more beating about the bush: climate change is a risk like no other and it’s accelerating. (1) A spate of recent research concludes that greater severity and intensity of extreme weather with its second-round effects (like rising waters) is not only happening, but on the increase. (2) Two central bank governors just called on financial regulators, banks and insurers to “raise the bar” to avoid a climate catastrophe, warning also about the impending “massive reallocation of capital”. (3) A major study by BlackRock shows that climate change is already having a detrimental effect on some securities like municipal bonds or utility stocks. It concludes that the markets under-price physical climate risks.
- The unprecedented nature of the risk demands an unprecedented response. We will be required to ditch some of our most basic assumptions about what today constitutes ‘normal’ life (easy travel, overconsumption and the like), and climate rebellion will come in different guises. Extinction Rebellion (a movement born in Britain that advocates mass civil disobedience for bold climate action), the global school strikes by climate activists or BirthStrike (an online community who opt not to bear children due to the severity of the ecological crisis) are all a foretaste of what’s to come.
- The main economic consequences of accelerating climate change are dramatic and fairly binary: (1) investors will increasingly punish companies that deny, play down or contribute to climate change; (2) investment in anything that can mitigate the risks associated with climate change will explode – obviously technologies that reduce carbon emissions, but also some surprising outliers like security firms: climate chaos and the contingent social unrest will boost the demand for corporate and individual security.
- The age of digital authoritarianism and the reign of techno-autocrats are upon us. China is leading the way, but eventually all countries will follow with different degrees of intensity: if (or when) the technology is in place, it will be used to monitor and track citizens. Some underlying themes: (1) the democratic space will shrink; (2) the world will “reborder” into different spheres of digital influence, (3) smart cities will equate with surveillance cities. The underlying investment theme (apart from the technology itself) is very niche: those places remote enough to provide a sanctuary free of digital interference will benefit: a hut in the mountains, a cabin in the forests, a boat at sea…
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