2022 trends to watch

"Ten economic trends that could define 2022" 4-Jan-2022

  • https://www.afr.com/policy/economy/ten-economic-trends-that-could-define-2022-20220104-p59lpj 

  • For the second year running the pandemic has reshaped the world – not changing everything, but accelerating many things, from population decline to digital revolution. Here is how these trends could define 2022.

    • Baby Bust

      • Couples had ample opportunity but apparently lacked the desire to bring children into a shutdown world. Declining birth rates have been lowering global economic growth and fell at a faster pace during the pandemic, including a dramatic drop in China. In the long run, the baby bust will further shrink the world’s labour force. Already, 51 countries have shrinking working-age populations, up from 17 in 2000.

    • Peak China

      • Slowed by the baby bust, rising debt and government meddling, China accounted for one-quarter of global GDP growth in 2021, down from one-third pre-pandemic. China’s increasingly sharp turn from trade to “self-reliance” is loosening its ties to other economies. Near perfect five years ago, the correlation between GDP growth in China and other emerging countries barely registers now. China may have peaked as an engine of growth.

    • Debt  Trap

      • Having mounted for four decades, global debt grew even faster during the pandemic, driven by government borrowing. Twenty-five countries including the US and China have total debt above 300 per cent of GDP, up from none in the mid-1990s. Money printed by central banks continues to inflate financial markets and deepen the debt trap. It is clear that societies addicted to debt find it tough to cut back for fear of bankruptcies and contagion.

    • Not the 1970s

      • Fewer workers, more government spending and rising public debt all point to higher inflation – but possibly not to the double-digit levels of the 1970s, as some pundits fear. Government spending should ease in 2022 and technological changes will continue to put a lid on prices. The bigger risk is asset prices. Financial markets have grown to four times the size of the global economy, and when markets crater, deflation often follows.

    • Greenflation

      • It is well known that the fight against global warming is raising demand for green metals such as copper and aluminium; less well known is that green politics is reducing raw material supplies of all kinds. Investment in mines and oilfields has dropped sharply over the past five years. The result is “greenflation” in commodity prices, which just had their biggest yearly increase since 1973.

    • Productivity paradox

      • Hope has vanished that rapid adoption of digital services during the pandemic would end the long decline in global productivity growth. A 2020 surge was confined to the US, and petered out late last year. The evidence so far suggests staff working from home put in longer hours with lower output. The paradox of weak productivity despite accelerating technological change persists.

    • Data localisation

      • The virus hit a world turning inward, with declining flows of everything (trade, money, people) except for data. Internet traffic in 2022 is likely to exceed all traffic up to 2016, with a twist. Defying hopes that the internet would evolve beyond government control, authorities are blocking data from crossing borders. The most restrictive regulations are arising in emerging countries led by China, Saudi Arabia and India.

    • “Bubblets” deflate: 

      • While this has been called the era of the “everything bubble”, a few assets do show classic bubble signs, from prices doubling in a 12-month period to manic trading. These “bubblets” grip cryptocurrencies, clean energy, tech companies with no earnings and Special Purpose Acquisition Companies (SPACs). Over the past year, all suffered falls of 35 per cent or more from the peak, a line beyond which bubbles rarely recover. A silver lining: tech bubbles like these often leave behind a few potentially giant survivors.

    • Retail (investors) cooling: 

      • Retail investors rushed into the 13th year of the global bull market, and excited late arrivals often signal the party is ending. From the US to Europe, millions of people opened trading accounts for the first time, and many borrowed money to buy stock at a frenzied pace. Such manias rarely last, suggesting that even if the sharemarket as a whole is not at risk, the names most popular with retail investors probably are.

    • Physical matters

      • Rising hype for the metaverse seemed to spell decline for the physical economy, but prices say otherwise. Digital natives need physical shelter too. Demand from Millennials and Gen Z helped inflate housing markets in 2021. Future tech does not make physical resources obsolete. Electric cars consume far more copper than petrol cars. Behind every avatar is a human, and labour shortages are lifting wages even in jobs most threatened by automation, such as truck driving. Requiems for the tangible are premature.

The writer (Ruchir Sharma), Morgan Stanley Investment Management’s chief global strategist, is author of The Ten Rules of Successful Nations.

Why the Greenspan-Bernanke put option may have expired - Chris Joye 7-Jan-22

  • https://www.afr.com/wealth/personal-finance/why-the-greenspan-bernanke-put-option-may-have-expired-20220105-p59m76

  • Given the multi-year lag between changes to a central bank’s cash rate and the full economic impact of these adjustments, and the fact that the US economy’s growth, employment, wages and inflation profile appear to warrant a current cash rate at or above its neutral estimate of circa 2.5 per cent, it is hard to understand why the Fed would only hike three times this year. That would leave its cash rate sitting at less than 1 per cent.

  • If this inflation shock is persistent, and long-term interest rates really do have to normalise to, say, the 3 per cent plus levels observed in 2018, it would be reasonable to expect some pretty material reductions in the value of many asset classes, including equities, fixed-rate bonds, property, venture capital, and crypto. And there will be frankly few places to hide.

  • Rapid normalisation of long-term interest rates, and hence the discount rates used to price all assets, is not just bad news for growth stocks. It is also bad news for venture capital, private equity, property, and fixed-rate bonds. In Australia, for example, the benchmark 10-year government bond yield has jumped from 1.55 per cent in mid-December to 1.9 per cent today. US 10-year government bond yields have similarly leapt from a December nadir around 1.35 per cent towards 1.75 per cent, at the time of writing. There is arguably still a lot of run-way left in these moves. When the Fed finished its last hiking cycle in 2018, lifting its cash rate to around 2.5 per cent, the US 10-year government bond yield pierced 3.2 per cent. And that was with benign inflation and wages outcomes!

If the Fed Tightens Too Much, They Will End up With an Equity Market Crash

  • by Louis-Vincent Gave, co-founder and CEO of Gavekal Research  6-Jan-2022

  • The new focus in China is de-dollarizing at any cost.

    • And to de-dollarize, they have no other choice than having a strong renminbi. The dollar, the euro, the yen, they are all being managed to depreciate. Over the next ten years, these currencies will go down against real assets like real estate, gold, or equities. And they will go down against the renminbi.

    • Let’s think this scenario through:

      • The dollar will roll over some time in 2022, and we’ll see more stimulus in China. This sounds like a good environment for emerging markets and commodities, right?

      • I think so, yes. What’s been fascinating about the commodity complex is that it has been pretty strong for the past 18 months in spite of a slowing China. I think the reason is that this bull market is not so much driven by roaring demand, but by a lack of supply. We have massively underinvested in all sorts of commodities, including energy, since the last commodity boom went bust in 2011. If you think of a world in 2022, where the coronavirus becomes endemic and we learn to live with it, we’ll have the release of pent-up demand in the US and Europe, and we’ll have some stimulus in China, with good growth around the world: First, I don’t see inflation coming down that much, and second, what you want to own in this kind of world is commodities, where a lack of supply will be met by roaring demand.

    • As an investor, looking into 2022: Which bets would you place today?

      • You know rugby is a big part of my life. I look at building a portfolio pretty much like you would build a rugby team, where you need different guys for different jobs. You need short, fat guys pushing the scrum, you need short, fast guys out in the wing, you need tall, lanky guys to jump in the line-outs, and so on. A portfolio is the same. You need antifragile assets, defensive assets, income producing assets, growth assets.

    • What about the income producing part?

      • Finding anything that produces good quality income today is difficult. There is one sector that I’m very fond of, and that’s energy, where companies have massively underinvested in the past years. Energy stocks offer high dividend yields. I think their yields are secure, because I don’t see energy prices coming down anytime soon. My main concern though is in the ability of the energy companies to keep that yield. My fear is that governments will come in and try to put a special tax on their profits to fund the energy transition. But I don’t see that political risk coming just yet, so my income producing stuff in the portfolio right now is all energy.

    • Anything else you’d buy?

      • I think Japan is a great growth play. After 25 years of consolidation, balance sheets have been cleaned up. Japan is involved in a lot of sectors that will be important in the future: Think of robotics, battery technology, semiconductors, hydrogen cars, automobiles in general. So looking at all this, I am bullish on Japan. A lot of good companies, trading at not too demanding valuations.