Stability Will Result In Shortage of Everything

Inflation raises the cost of capital and introduces volatility, making it more difficult for companies in their decision making.
Inflation raises the cost of capital and introduces volatility, making it more difficult for companies in their decision making. (SaxoGroup)

 

Global economy is entering the decade where the return on equity will be much lower due to the radical political decisions.


ANALYSIS

An increasing amount of economic analysts believe that due to the Wuhan virus pandemic, politicians are shifting their focus from financial stability to social stability. Efforts by the authorities to simultaneously address three major issues - inequality, green transformation, and several infrastructure issues - will mean higher costs for the global economy. Such policy will result in inflation, a higher marginal cost of capital, and an understanding that the main problems need to be solved, but not simultaneously.

The main message we want to convey to investors is that today you live in a world where every aspect is different from what you have ever seen, commented Mr. Steen Jacobsen, Chief Economist and Chief Investment Officer of Saxo Bank on the earning expectations in 2021. The days of a belief that the economy can be revived by lending money, relying on the banking system, and focusing on simple financial stability are over, he added.

The global economy is experiencing a shift in the attention of politicians from financial stability to social stability. One can call it the "paradigm of social stability". Politicians, unfortunately, revived the old-new mantra of printing and spending as much as possible until key rates and inflation can be kept low. At first glance, it seems very simple, but the consequence of this old-new policy is inevitably galloping inflation.


Some economists believe that the rise in commodity prices has already become more synchronous in all three sectors: energy, metallurgy, and agriculture.

The short-term outlook may become more challenging, as paper investments are subject to a diminishing risk appetite, spread by the recent rise in bond yields. As a result, Danish bank economists expect a continued rise in oil prices in the next quarter, but if the rally is driven by supply rather than demand, it would slow economic growth.

According to some economists, in the second quarter, the dollar may turn down again, even if volatility persists. If the global economy recovers in the second quarter, then investors will turn to oil-related currencies such as the Norwegian kroner and Canadian dollars. Ultimately, the US dollar must fall again to keep the global economy on a reflationary trajectory. A strong dollar is simply too toxic. The fall of the US dollar will result in deflation price of other pegged currencies, or those with inter-connected markets, especially in Asia.

 

The biggest trend since the great financial crisis is the divergence in earnings growth between Nasdaq 100 and the global equity market, highlighting the grotesque relative success of the online economy over the physical economy.
The biggest trend since the great financial crisis is the divergence in earnings growth between Nasdaq 100 and the global equity market, highlighting the grotesque relative success of the online economy over the physical economy. (NYSE Via Bloomberg)



In the second quarter, the price of the US dollar will likely fall. Even if the above problems cause additional bilateral volatility, as in the first quarter, stated Mr. John Hardy, a chief currency strategist at Saxo Bank. The Japanese yen will be in trouble. The continued rapid growth of global yields and commodities will be a powerful negative signal for these currencies.

The European bank's analysts emphasised that the money that was pumped into the global economy after the pandemic accounts for more than 20 per cent of global GDP before the 2019 coronavirus, at that time $ 88 trillion.


The fact that more than 80 per cent of this amount is probably derived from developed markets also distorts the distribution of this incentive. Various speculative practices are gaining momentum through monetary and fiscal measures, which in turn delay the need for structural change to create a sustainable and environmentally friendly just society.

In a world where scarcity is becoming more apparent, deflationary assets - whether traditional financial securities, cryptocurrencies, or land - will benefit, the author of UBS economic forecast says.

Allocating capital to talent and attractive investment opportunities is true value creation, stated Mr. Kai Van Petersen, global macro strategist at Saxo Bank. And that's before we fully open up after the pandemic, not to mention the potential trillions in infrastructure spending under the Biden-Harris program. Oil has risen in price by 30 per cent since the beginning of the year due to a structural shortage of supply and an intensified game on the post-economic opening.


The political control of the demand for strategic resources will increase over the next 5-10 years


Moving forward, companies and even entire countries will focus on reforming critical areas and making supply chains more resilient and self-sufficient, as well as bidding to secure supply, restore jobs and manage manufacturing risks, the Commerzbank economist said. It is another reason for prolonged inflation, real asset growth, cyclicality, and small capitalization. The race for technological supremacy is also fueled by the acceleration of digitalisation in the wake of the pandemic.

The demand is growing - from semiconductor chips to copper - and manufacturing capacity remains limited. But the demand for copper may fall anytime if a political decision is made that the current production levels benefit Communist China. The country has been the main, and increasingly dangerous enemy of the US Western allies like Japan, Australia, or New Zealand. For this reason, the political control of the demand for certain resources will increase in the next 5-10 years.

Tangible assets will outperform non-tangible ones, and assets with positive convexity will win and ultimately we are in the final round of pretending we can solve a productivity/solvency crisis by creating more debt.

Climate and supply constraints exacerbate inflationary pressures leading to higher costs. Add to that a big fiscal shift in demand-pull inflation and worsening supply constraints, and there is a cocktail of higher inflation.

According to Mr. Ole Hansen, head of strategies for the Saxo Bank in the commodity market, by the end of June, the price of Brent crude oil may be fixed at around US $68 per barrel, the price of gold - US $1850 but it will gradually depreciate as every other commodity.

But the global economy is entering the decade where the return on equity will be much lower compared to 10 previous years. 

To ensure social stability, the focus will now turn to increasing the income for labour (salaries, redistributive benefits) relative to capital. It will mean higher wage inflation and lower equity returns over time. 



Tangible assets will outperform non-tangible ones, and assets with positive convexity will win (those few assets that benefit from rising yields and a global demand in resources) and ultimately we are in the final round of pretending we can solve a productivity/solvency crisis by creating more debt.

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