Virus variants are stealing a march on vaccination efforts. Linear thinking will always fail to pick up the financial (and other) impact of macro events. With inequality now firmly on policy makers’ radars, the value of social capital is being increasingly recognised. Investors and financial institutions are now recognising climate risk. For value creation don’t underestimate human ingenuity.

  • The longer the pandemic lasts, the greater the damage it will inflict – economically, politically and socially. The whole world is engaged in a race between the various COVID variants and the vaccination campaigns, and so far, the pandemic is winning. Israel is a sobering example. Despite the world’s fastest vaccination campaign (already 30%+ of the population) combined with a harsh lockdown, Israel’s infection rate barely declined (from 10.2% to 9% in January), forcing the country to close its international borders. If the variants give COVID the ability to always be one step ahead of the efforts to contain it, a rapid vaccine-driven global recovery looks more and more like a pipedream.
  • Financial investors underestimate non-economic risks – underappreciating the extent to which the economic crisis and dislocations spurred by COVID are bound to have a profound impact on social and political stability. This is attributable to linear thinking about phenomena that generally manifest themselves in terms of “cascading effects”. An example to prove the point: an increase in the level of unemployment by 1 percentage point tends to increase the share of votes for far-right or far-left parties by 2 or 3 percentage points (not 1!). For this reason, shocks and crises tend to favour extremism and radical policies like capital control.
  • A simple rule-of-thumb for investors and other decision-makers is this: when and because events cascade, things tend to happen faster and with greater magnitude than we think or predicted. This holds for both complex living systems like societies (with political upheaval and social turmoil often taking us by surprise when it shouldn’t) and natural ecosystems (global warming happening much faster than we thought just a few years ago). We can take a cue from Hemingway’s The Sun also Rises. How did you get bankrupt? Two ways: gradually then suddenly.
  • The US, having flirted with the abyss, is proof of this. Who would have imagined a year ago that an undeclared coup d’état would be attempted in the country that exemplified for so long the ideal of liberal democracy? American institutions have withstood the shock, but as one prominent thinker observed on 6 January: “If the post-American era has a start date, it is almost certainly today” (R. Haas). What lies ahead for investors? (1) US stability is now an open question; (2) Domestic right-wing extremism will increase, which is bad for confidence and economic growth; (3) Globally, governments have learnt that the societal backlash against perceived inequalities and injustice is by far the greatest danger.
  • The US home grown insurgency, riots in the Netherlands, and even to an extent the GameStop saga (essentially a battle between amateur investors and Wall Street) are disparate phenomena that share one commonality: It is already erupting in some places and bubbling below the surface in many more. The mob storming the Capitol is reminiscent of the Beer Hall Putsch (1923), but more generally there are rumblings of resentment in many different places and countries. This doesn’t mean massive unrest will happen, but it could.
  • For an in-depth analysis of any of the bullet points and what they mean for you, please contact us at thierry.malleret@monthlybarometer.com, and ask about gaining access to our tailor-made research and unrivalled network.