Interests rates will be a bit higher for much longer. European governments have little choice when it comes to fiscal discipline, but must also rise to the challenge of investing in innovation and competitiveness. China’s response to the challenge of slower economic growth but beware weak domestic demand. Escalating violence and an unwinnable war. Almost everything can be a target and/or potential weapon. The division of the sexes. AI good but not always better.

  • INTEREST RATES: COMING DOWN BUT STILL HIGHER FOR LONGER. In previous issues of the Monthly Barometer, we expanded on the structural reasons why interest rates may surprise on the upside (most notably: trade tensions, end of hyper-globalization, and geopolitical turmoil). There is another powerful reason: many economists concur that the ‘neutral’ rates (i.e.: the level of real interest rates at which monetary policies are neither stimulative nor restrictive) are slowly moving upwards as populations age. Fast-growing elderly populations tend to spend their savings, thus reducing the demand for bonds and raising their yields.
  • FISCAL DISCIPLINE: NO CHOICE. Two years ago, the market disciplined the British PM for putting forward unfunded tax cuts. It lost confidence in both the UK’s currency and bonds, forcing Liz Truss to resign. Today, policymakers around the world are fearful of the potential ignominy of their own ‘Truss’ moment. Many countries are over-indebted and running excessive budget deficits, which can be OK until it isn’t (what makes a debt sustainable is an arcane issue). As a result, concerns about debt sustainability impose a straitjacket on policymakers while becoming an acute political issue, further exacerbated by low GDP growth and poor demographics (ageing).
  • FRANCE’S PERILOUS STATE. France could experience a Truss moment if a leftist or far-right government were in charge. The current conservative government, which might fall sooner than most assume, just asked the European Commission for another delay in submitting its budgetary plan. It needs to rein in spending by roughly €15bn a year over the next 7 years in a highly unstable political environment. As a result, French debt prices are rising, slowly converging with those of Spain and Greece.
  • EUROPE’S “EXISTENTIAL CHALLENGE”. Much has been said and written about Draghi’s recently published report. The bottom line: A roster of comprehensive and unprecedented reforms is required to make Europe more innovative and competitive. This includes €800bn a year(to digitalize and decarbonize the economy) plus the issuance of common bonds.
  • CHINA’S STIMULUS. The government just announced a series of measures to revive economic growth and boost public sentiments. A consequential monetary stimulus will be accompanied by an even larger fiscal one, with the total package possibly amounting to 3tr yuan ($426bn: 2.3% of GDP). Much of the outcome will depend on the proportion that goes to domestic consumption, but it’s likely that these short-term fixes won’t alter the long-term picture. The structural forces of an economy constrained by weak domestic demand will keep considerable pressure on growth.
  • TWIN GEOPOLITICAL ESCALATION OCCURRING CONCOMITANTLY. (1) In the Middle East, Israel’s battering of Hezbollah in the Lebanon (Iran’s most important proxy) is testing the limits of Iran’s self-restraint. Netanyahu having ignored US, European and Arab calls for a 21-day cessation of hostilities, much now depends on the decisions made by Israel and Iran hardliners. (2) Russia’s escalation is everywhere. It ranges from (1) Putin’s revision of the nuclear doctrine (to restore the credibility of nuclear threats) to (2) an ongoing campaign pf sabotage and subversion in Europe and (3) the exacerbation of geopolitical turmoil – like advising the Houthis and considering the handout of anti-ship cruise missiles that would cause havoc for global trade (it seems that KSA, and possibly China, this time refrained Putin from doing so).
  • THE UNWINNABLE WAR. Russia would already be on its knees if it weren’t for the support of the China, Iran, North Korea axis of which it is part. This “quartet of chaos” is determined to bring the Western-world ‘order’ to an end and engages in “strategic transactionalism” (i.e. cooperating on an ad-hoc basis) to do so. This alliance makes Russia’s war in Ukraine unwinnable for both camps – a serious headache for Western policymakers, and further down the line for investors whose horizon will be increasingly clouded by geopolitical risks.
  • TARGETS INFINITE & UBIQUITOUS. Israel’s electronic attack on Hezbollah – with hundreds of pagers and 2-way radios exploding simultaneously – is a taste of things to come. Such tactics have been used for years, but it is the first time that we can measure so palpably the extent to which every device can become a target. Equipment of any kind – a phone, a car, a bike, a thermostat, or an ear-bud – can now be subverted, sabotaged and weaponized, ever more easily due to the intricate complexity of supply chains and the Internet of Things. Such attacks will multiply in a world of increasing great power competition. For investors, this will result in more fragmentation of supply chains, with governments deciding that tech can only be bought from countries and suppliers that they trust. The US proposed ban on Chinese software and hardware in advanced vehicles is proof of that. Financial investors beware: the fortune of companies like Tesla could turn overnight.
  • MEN AND WOMEN: PARTING WAYS? To a certain extent all over the world, but most notably in the richest and culturally liberal countries, young men and women are polarising, making it more difficult to relate to one another. On average, women tend to be more progressive than men, more successful academically, less religious, and less desirous to start a family. This rising gender divide generates sexist resentment among men and frustration or indifference among women. It may be one of the reasons why global fertility rates are plunging so drastically and unexpectedly.
  • MORE AI SKEPTICISM. AI is everywhere and has captured the zeitgeist, but a growing chorus of analysts fear it is an economic and financial bubble. With about $1tr. set to be spent on AI in the coming years, they doubt business will get a commensurate return. A Goldman Sach’s review on AI services at the bank concludes they are “costly, cumbersome and not smart enough to make employees smarter.” An example: AI used to automatically update spreadsheets with companies’ financial results saves analysts 20 min per company but costs 6 times more.
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