The UK government awarded hard-working medical staff a meagre 1% pay rise in the most recent budget, all the while splashing out on yet another indirect subsidy for house prices: the mortgage guarantee.
Continue readingThe turmoil we are currently seeing in stock and bond markets is just one battle in the war that has been going on in capital markets for a long time: debt versus equity versus central banks.
Continue readingWith news of another Covid-19 vaccine on its way and optimism rising ahead of the end-year holidays, it looks like 2021 will shape up to be much better than 2020.
But one forgotten danger could spoil the party: inflation. Price rises are far from investors’ minds, but an ‘inflation tantrum’ could have devastating effects on various countries’ economies if they are not kept in check.
The abrupt fall from grace of Dominic Cummings, the much-admired and much-loathed adviser to UK Prime Minister Boris Johnson, has sparked all sorts of theories as to what was behind it, and with good reason.
Cummings’ actions have been divisive and often controversial, starting with his choice of “misfits and weirdos” to replace civil servants whom he sacked unceremoniously, to the famous drive he took across the country while both he and his wife were ill with Covid-19 and a national lockdown was in place.
Despite central banks keeping interest rates at the lowest levels in history and buying debt like there’s no tomorrow, the mountain of debt is not getting any smaller. Emerging markets are, as usual, the place where people are looking for the first signs of trouble.
If after the great financial crisis of 2007-2009 the word “extraordinary” characterised monetary policy, the Covid-19 pandemic calls for a much stronger adjective: “unprecedented”.
As the world has never before been faced with an instance when virtually all economic activity stopped for a certain period of time, this is an appropriate word. However, in monetary policy really very little can be said to be truly “unprecedented”.
For example, take modern monetary theory (MMT) — a theory about how to have your (monetary) cake and eat it, which (simplistically) states that if a country can print its own currency, that country will never default on its debt because it can create as much currency as it wants to and use it to pay back the debt.
Major central banks, to a certain degree, have already begun versions of MMT.
As governments and central banks around the world throw money at their economies trying to mitigate the pernicious effects of the Covid-19 outbreak, debt is mounting at an alarming pace.
Once the first, acute phase of the pandemic-induced economic crisis ends, something will need to be done about this debt.
The panic buying of essential items around the globe – from food to, fittingly, toilet paper – sparked by the spread of the COVID-19 coronavirus has been mirrored by panic selling in capital markets. It’s almost as if investors were taking cash out of stocks and bonds to buy whatever food, hand sanitiser and toilet paper they could get their hands on.
Pessimism in global financial markets has reached heights not seen since the dark days of the great financial crisis of 2007-2009, which this current crisis threatens to overtake in depth and significance. But, as news about rapid tests for COVID-19 and resilience to deal with the virus begin to multiply, could investors hope for a bottom in the capital markets’ selloff?
Central banks are again under the limelight. With Mark Carney’s departure as governor of the Bank of England next month, Boris Johnson could try to seize the opportunity to curtail the central bank’s independence.
This should not come as a surprise. Already, Johnson’s soulmate from across the ocean, Donald Trump, has been making noises about the Federal Reserve being too independent (or rather: insubordinate) for his liking.
So, if these two authoritarian populists go for central banks, what are their chances of bringing them under their rule?
Of all the fears sweeping the markets right now, perhaps the most worrying is the fear of a debt crisis in the corporate sector.
Warnings about corporate debt rising to unsustainable levels are intensifying, at a time when interest rates are at record lows and even Greece joined the club of negative-yield sovereign debt issuers.