Uncertainty is the certain fallout from a mix of multiple global crises. The era of low interest rates is over, but recessionary risks are outrunning inflationary ones. The war in Ukraine and the Chinese property crisis should stay at the forefront of our minds – whatever the headlines are saying. With democracy diminished, can the US remain a financial ‘safe haven’ beyond 2024? Unpredictable geopolitics remain the major threat to Eurozone stability. Globalisation is morphing into something different and the gig economy looks set to run out of funding. The merits of Web 3.0 remain a mystery.
  • POLYCRISIS – Decision-makers face a disorientating amalgam of multiple crises. From an economic standpoint, the unprecedented combination of inflationary and recessionary forces at a time of high global indebtedness equates to a major source of uncertainty. In turn, this is exacerbated by the plethora of environmental, geopolitical and societal crises unfolding around the world. In so many dispiriting ways, the Great Reset is turning into a Great Regression.
  • RISING INTEREST RATES AND RECESSION RISKS – More than 50 central banks have already raised interest rates by at least 50 basis points to rein in inflation. There will be more to come in July. Such a massive regime change (the era of low rates is over) will probably in the next 12 to 18 months in the US, earlier in Europe, usher in a global recession. How bad and how long will it be? This depends on each country or region, but (1) higher commodity prices, (2) higher interest rates and (3) trade disruptions will affect consumer and business confidence all around the world. As a result, and for a while, the global economy will have too much inflation and not enough growth. This said, it seems that recession risks (that destroy demand) are now overtaking inflation risks.
  • ONGOING RELEVANCE OF (SOME) FADING NEWS – It’s not because a crisis disappears from the front-page that it ceases to matter. Two examples stand out. (1) The war in Ukraine is slowly slipping from the headlines but the risks of escalation and the evidence of a long war of attrition persist. Putin will weaponize everything he can, notably food and energy. (2) Although the Chinese real estate problems have all but gone from the news, they haven’t been sorted out. Spreads of Chinese high-yield real-estate bonds versus government bonds are now even wider than they were some months ago.
  • DORNBUSCH LAW – “A crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought.” This is the simple framework proposed by the German economist Dornbusch that can be usefully employed to be better prepared for the next crisis, whatever it may be. It was initially conceived in relation to currency crises, but it works for geopolitics (the Arab Spring), societal issues (the Yellow Vests) and of course the environment too. Straightforward but effective to bear in mind!
  • CIVIL CONFLICTS AND SLOW DEATH OF DEMOCRACY IN THE US – For years, US academics and former senior intelligence officers have been warning that their country is descending inexorably into an era of ideological fanatism, unrest and social violence. For long-term investors and decision-makers, it’s time to plan for the possibility of protracted chaos following the 2024 Presidential election. What’s the writing on the wall? 2/3 of Republican voters think the past election was stolen from them, and about 60% view the storming of the Capitol as an “act of patriotism”. Meanwhile, election deniers and MAGA candidates are winning primaries for governor, senator, or attorney general positions. Hitherto unimaginable questions now need to be asked, like: what happens in the markets when civil conflict erupts in the world’s financial ‘safe haven’? How would a Republican administration regulate corporate behaviour? How would it affect countries abroad that rely on the US for their security? Would Trump or a proxy ‘undo’ everything (trade, climate policies, support for Ukraine, etc.)? We are staring into the abyss.
  • RISING SPREADS IN THE EUROZONE – Like in 2012, markets are fretting about rising spreads within the Eurozone, this time Italian debt yields. The level of Italy’s public indebtedness is higher than it was ten years ago (150% of GDP versus 127%), but (1) The EU800bn recovery fund means that a fiscal instrument now complements monetary policy – over the next 5 years Italy will benefit from support amounting to 12.5% of GDP; (2) For now, Italy’s debt-to-GDP ratio is falling and its economy rising (it was the opposite 10 years ago). But this may not last. Meanwhile the Eurozone’s two main downside risks continue to be: (1) geopolitical, with Russia abruptly shutting off all energy supplies (it’s happening, but slowly) – which would cut GDP growth by up to a half; (2) political, with populist and extremists coming to power, with the resulting ungovernability. On 21st July, watch out for the ECB announcement regarding its new tool to prevent ‘fragmentation’, and never underestimate the ECB resolve!
  • GLOBALISATION IN (SLOW) RETREAT, BUT NOT CONDEMNED. The deglobalisation narrative is wrong: globalisation is not dying. Rather it is morphing into something different and being reconfigured by notions like ‘resilience’, ‘near-shoring’ and friend-shoring’. The trade historian Douglas Irwin best explains what’s going on when he describes the situation as “a strengthening of the centrifugal coupled with a weakening of the centripetal.”
  • DEATH OF THE ‘SERVANT ECONOMY’ – Rising interest rates and the bursting of the tech bubble will make life very difficult for the majority of lossmaking or barely profitable companies that make up the gig or ‘servant economy’. With the cost of capital increasing, the Uber, WeWork, and other Deliveroos of this world will meet closed doors when seeking more funding from the VC firms that until now subsidised their clients (gig companies typically undercharge for their services). The policy of abandoning short-term profit for long-term growth has proved to be a fallacy.
  • HAVING A HARD TIME EXPLAINING THE BENEFITS OF WEB3.0– As we’ve said in the past, the divide between early proponents is diametric, making the true picture hard (if not impossible) to fathom. Scott Minerd (CIO of Guggenheim Partners) is now on record saying “no one has cracked the paradigm in crypto” while Mark Andreessen storms onward with a new $4.5bn crypto fund. Yet, as this video illustrates, Andreessen, who enjoys the reputation of a highly articulate and sophisticated investor, nonetheless seems unable to explain in simple terms what the major benefits of web3.0 actually are.
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