With half the world infected, Omicron now looks to be in retreat. Growth is slowing down, while uncertainty and its contingent risks persist. The Fed’s approach to inflation is now certain, but is wage inflation here to stay? The pandemic has put paid to convergence. Green finance looks increasingly like a bubble waiting to do what bubbles do. What Putin will do in Ukraine — only Putin knows. In the geopolitical scramble for energy, the advantage is shifting towards the oil producing autocracies and state-owned suppliers. While democracies are dogged by a troubling collapse in their citizens’ trust.
- There are good reasons to believe that Omicron will be in retreat by March, after having infected half the world’s population. This won’t be the end of Covid, but it will see the end of the stringent measures aimed at dealing with it. Most likely and by and large, the exceptional policies taken by governments to control the virus will be withdrawn. A semblance of normalcy will return, putting an end to the plight endured by service industries like hospitality, travel & tourism.
- As we enter 2022, growth forecasts for the year are being revised downwards (like from 4.9% 3 months ago to 4.4% a week ago by the IMF). Globally, (1) tighter monetary policy, and (2) continued supply chain disruptions are the key culprits. The slowdown will be particularly marked in the two main engines of the world economy which in addition face their own set of issues: worker shortages and political stasis in the US; real estate crisis and 0 Covid policy in China.
- Moving forward, risks are firmly on the downside. Consider the following challenges and the way in which they conflate with each other: (1) lower growth and higher inflation, (2) unprecedented global indebtedness, (3) geopolitical turmoil, (4) recurrent and sudden shocks provoked by the climate and nature emergencies. Decision-makers face a barrage of uncertainty as small causes can produce oversized effects (a key principle of non-linearity).
- Ambiguities about the Fed’s intentions are gone. It just announced the end of its asset purchase programme in March followed by an immediate increase in interest rates and a subsequent gradual reduction of its USD8.9tr balance sheet. Jay Powell hasn’t ruled out a more aggressive posture if need be. Now that the tap of liquidity infusion is being turned off, the financial markets have every reason to feel nervous. Due to the prevailing uncertainty, market volatility is a given – in 2022, the triple-whammy of (1) rising interest rates, (2) decreasing corporate earnings and (3) rising geopolitical turmoil will weigh ever more on investors’ sentiments.
- The major area of uncertainty about future inflation is what wage inflation will do. It is already hitting some industries (like finance) hard, but there is not (yet?) widespread evidence of a wage price loop. It is still too early to tell whether the balance of power between labour and capital has shifted, but if it has, the Fed, and possibly other central banks, will have to tighten monetary policy still further.
- The pandemic has reversed the convergence trend. In the last 2 decades, incomes in developing countries had been gaining ground on those in the rich ones, but a combination of (1) a lag in vaccination rates, (2) tighter fiscal and monetary policies and (3) higher inflation has brought this hopeful process to an end and even reversed it (many rich countries now grow faster than poor ones). The current situation in Sri Lanka epitomizes this predicament. After Belize, Zambia, and Ecuador, it may be the next country to default on its sovereign debt. What are the implications? More poverty and human suffering followed by an increase in social and geopolitical turmoil.
- As ESG boom, so does the risk of a bubble in green finance. Over the past 5 years, ESG assets have risen tenfold among mutual funds and ETFs; and now represent around 40% of total professionally managed assets. The BIS (the central bank of central banks) recently warned about financial imbalances caused by the proliferation of ESG products when rigorous ESG metrics and market transparency are still lagging (or lacking). What are the ‘bubbling’ signals to look for? (1) The size of the lower premium that market participants demand for bearing financial risk when investing in green (the ‘greenium’) or social (the ‘socium’); (2) the shorting activity around big green stocks.
- The fact that only Putin knows whether Russia will invade Ukraine or not, combined with Russia’s habit of “cross-domain coercion” (a complex blending of real or threatened use of force, cyberattacks, propaganda and diplomacy) makes it’s nigh on impossible to figure out what’s coming next. The backdrop to Putin’s behaviour: he’s fomenting trouble because, like so many other international leaders, he’s sensing US’s weakness (with a President in retreat abroad while weakened at home). The new international (dis)order is based upon aspiring and regional superpowers wanting to carve their own sphere of influence and dominate their own neighbourhoods (just as the US did). This is the reason why China is siding with Russia in the Ukraine crisis.
- Energy is fuelling geopolitical and social turmoil, as evidenced by crises as different as the stand-off between Russia and the ‘West’ or protests in Malawi and Kazakhstan. Over the next 30 years, even under the most bullish assumptions regarding green investment, oil & gas will remain a significant portion of the energy mix. During this period, those autocratic regimes which benefit from lower costs and lower carbon footprints and state-controlled energy suppliers (‘uncambered’ by ESG considerations like the majors) will get the upper hand.
- The Edelman 2022 “Trust Barometer” makes grim reading. The annual survey on the single most important element that glues societies together and significantly correlates with economic growth and development shows that trust is vanishing. Globally, a majority of people believe the media (67%), political leaders (66%) and business executives (63%) are “purposely trying to mislead people”. The collapse in trust is particularly acute in democracies with citizens retrenching into closed circles – only trusting the like-minded. This is a most worrying sign of societal malaise that nobody really knows how to fix yet.
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