What will the new normal be?

The world is more than 20 times as indebted as it was 25 years ago

World map.
World map.

Julio López (Attutude Gestión SGIIC) |Beethoven’s Symphony No. 5 in C minor was first per­formed in 1808, but gained par­ti­cular pres­tige du­ring World War II. The British no­ticed that the fa­mous ope­ning theme (da-da-da-dum) had the same rhythm as the letter V in Morse code (. . . …) so the symp­hony be­came a symbol of vic­tory over Nazism: the BBC al­ways began its broad­casts to oc­cu­pied Europe with those four no­tes.

Just a fortnight ago, it seemed that on all the stock trading desks, the only tune playing was that of the wonderfully deaf man from Bonn. Having bet all our chips on the red of rate cuts during the last two months of last year, the start of the year is bringing more doubts; and the bright and shining landscape now seems more misty and unsettling than it had appeared before. Reagan said that the most frightening phrase in the English language was “I’m from the government and I’m here to help”. The most dangerous thing in markets is when all investors reach a consensus on what is going to happen. At the end of December, the consensus was for rapid rate cuts and a soft landing for the economy. This leads us to believe that at least one of the two will not happen.

Market recovery

Just as at the end of October we warned about the extreme bearish positioning that could encourage a market recovery, we now find ourselves in a diametrically opposite situation, with extreme positioning in both fixed income and equities that at least makes us wiggle our noses, and has put us in a position of preferring to stay out of the fray and watch from the sidelines. I am surprised that after three years of mercilessly missing the mark, monetary and economic policy makers are still predicting inflation trends without any blushes. Some have already declared inflation beaten and disarmed, when the last two US monthly data have been upwards. The declines could have been foreseen because of the comparative effect, but it is proving much more difficult to go down from 3.5% to 2.5% than from 9% to 4%. I can say that I am cautious or appeal to the Socratic, but there are arguments for one side or the other. Everything happens so fast that we want to have immediate rather than substantiated answers.

Almost four years after Covid, we still do not have a clarifying answer as to what has happened to globalisation, whether there was a pause or whether we are back, and the effect on global production chains.

It only takes a conflict such as the one in the Red Sea for us to see a halt in the automobile industry, for example, which can trigger price rises again, going beyond the increases in maritime transport itself. On the other hand, we are witnessing significant falls in raw material prices. Aluminium has fallen by 40% from its highs, copper by 23%, corn by 33% and wheat by almost 50%.It seems that in the face of rising prices the economy in many places has functioned in the traditional way, and has responded with increases in production that have driven prices down again, returning to their cyclical nature, beyond the volatility that financial markets exacerbate.

On the employment side, the objective data can be considered good at the global level, even if in the United States they are starting to be somewhat mixed. The European Union has presented its best unemployment figure since 1998, at 6.4%, which is really low for the old continent. The only downside is that youth unemployment remains extraordinarily high and Spain continues to lead the way with 27.9% youth unemployment. What we are witnessing is, as in the case of housing, an increasingly large segmentation of the market, so that arithmetic averages mislead more than providing accurate information. There is a big difference by sector, with shortages in many sectors and surpluses in others. Beyond economic activity, there are two aspects that will mark the coming years in employment. On the one hand, we have a frightening demographic trend. In Western countries, we are facing the 10 years with the highest number of expected retirements in history, which will make the replacement effect easier for young people to get a job (another thing is what they earn and have to pay to maintain the passive classes). On the other hand, we have yet to see how the much-talked-about Artificial Intelligence will affect the economy.

Optimistc report

This week the IMF has come out with a not overly optimistic report, in which as a headline we can say that artificial intelligence will affect 40% of jobs globally and may worsen inequality between countries and within their societies. It is a technological revolution that is likely to impact advanced economies more than emerging ones, replacing and complementing high-value jobs. For those who have read Acemoglu and Robinson’s incunabulum Why Countries Fail, the parallels with the industrial revolution of the 18th and 19th centuries that shaped winning and losing countries for the next 200 years will not seem strange. We are likely to see jobs and workers benefiting from its implementation, with staggering productivity gains, and on the other hand we may see jobs with lower wages and reduced hiring, if not other jobs disappearing. The substantial difference with the previous industrial revolution is that this time it will not only affect repetitive and monotonous low-skilled jobs, but will also affect hitherto well-paid jobs.

From the point of view of monetary policies we are now at an important moment. The great growth of the last 40 years came from a brutal lowering of interest rates, massive money printing, and unparalleled fiscal stimulus and borrowing. The key is whether we will return to a more orthodox pre-2008 crisis policy, or at the slightest hesitation in economic performance we will revert to the same recipes of the last decade and close our eyes. In the last two years, the Fed has gone from holding 24% of the bonds issued by the US government on its balance sheet to 17.7%. Despite the declines, these figures are still enormously high by historical standards. Moreover, the world is more than 20 times as indebted than it was 25 years ago. What will the new normal be? Will it be that of the last decade or the average of the last hundred years, because the results of where interest rates should be is very different.

Winston Churchill said of the Americans that they always end up making the right decision, but only after they have tried all the other alternatives. I think this will have an impact on the markets with rises, falls and increased volatility.

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