During my deliberation, when I met my Macro Economics Prof John Huizinga from University of Chicago Booth in a networking event in Singapore in 2014, he made a very significant statement
“We have borrowed future growth rate with QE”. Very deep and germane for the market today.
Today markets are groping for economic confidence which is nowhere to be seen even from the mountains of Himalayas. One of the most respected global investors who I follow for my economic thoughts in today’s market: Stanley Druckenmiller—Chairman/CEO Duquesne Family office and visiting fellow in economics at Stanford University’s Hoover Institution wrote an article in Wall Street Journal on Dec 16-2018, he shared
“Central bank should pause its double barrelled blitz of higher interest rates and tighter liquidity. This is a time of choosing. We believe the US economy can sustain strong performance next year, but it can ill afford a major policy error, either from the FED or the rest of the administration”.
FED AND ITS POLICY ERROR—-MISLEADING THE MARKET AND INVESTORS.
FED Chair Powell is in quandary at the moment. It has been behind the curve in the last 16 years and living in delusion of grandeur. On June 28-2017, Ex FED Chair Janet Yellen giving interview to Fox Business said: We will not see financial crisis in our life time.
She got it all wrong. The cognitive dissonance her statement was absolutely breathe taking. Then she missed out on many variables and lost her credibility long time back. The main issue with US central bank is that the economic and predictive models are not helping the FED. These models are banal in delivering economic outcomes effectively. FED needs to focus more on realized economic and financial data in order to fathom the macro-economic fundamentals better.
According to Economist magazine last month issue dated Dec 15-21/18:
Powell needs a new strategy to stay ahead of the market. The fiscal stimulus from President Trump tax cuts, which rescued the American economy from economic meltdown, will soon begin to subside. Trade war is sapping confidence and consumers are feeling a sense of despondency.
S&P 500 Index has fallen by almost 10% in a little over two months as growth expectations have ebbed. The difference between yields on short term and ten years bonds, which typically turns negative before recession, has fallen close to zero, giving sleepless nights to investors.
POWELL DOCTRINE IS NOT WORKING: MARKETS ARE GROPING FOR CONFIDENCE IN 2019.
POWELL IS PERPLEXED ABOUT THE MARKETS. He does not really fathom the financial markets chemistry and their outlook. He is grappling with market complex behaviour and movements. The markets are in a mood and moving like a drunken sailor. We can foresee vicious rallies in 2019. Many investors will get squeezed out of shorts. We can foresee amount of $23-25 trillion value being wiped off the equity and bond markets in the next 10-12 months. Wild rallies in the equity markets are becoming the new norm and investors have to live with them. FED is running out of the policy instruments and levers to stimulate growth. Markets are getting out of Powell’s hand. Time for market dictation is gone.
CENTRAL BANKS ARE UNDER THE SPOTLIGHT —-TO DELIVER ECONOMIC OUTCOMES.
Central banks have taken sole responsibility in delivering outcomes. But they have faced many challenges in terms of economic and financial headwinds. Investors are looking at 4 central banks very closely. Big 4 central banks [ FED / ECB / BOJ / BoE] would create global crisis and turmoil in the financial markets with unorthodox policies. Global central banks tried to borrow future growth by QE/ Balance-sheet accommodation and monetary expansion in the last 11 years. But they have failed miserably to spur growth in their economies.
Quantitative easing, policy levers, experiments, helicopter money, operation twist and monetary expansion have not bolster growth outlook. Big 4 central banks have zero monetary tools to save their economies which lack macro fundamentals. Economic Bloodbath will happen in
Europe / USA / UK / South America.
Few red flags for the global economy
- Oil prices
- Technological supremacy
- Industrial espionage
- Geo political risk.
GLOBAL PLAYERS TALK. —–ASSET PRICE DEFLATION IS POSSIBLE.
Some of the top players in the global financial markets have shared their thoughts on various media and expressed their views about equity markets, Brexit and bond market including
Pacific Investment Management Co., [PIMCO], Group chief investment officer
- Beware of rising volatility, widening credit spreads and a flattening yield curve that are indicating an economic downturn within 12 to 24 months.
- Increase cash positions now to await opportunities, such as wider spreads and overshooting to the downside in corporate debt. Potential opportunities are found in U.K. financials, after valuations sank amid fears about a chaotic Brexit, which PIMCO believes is a low-probability event.
- We are beginning to see a few select opportunities around credit, but we remain concerned about credit in general.
BlackRock Inc., Global chief investment strategist
- In equities, we like quality: cash flow, sustainable growth and clean balance sheets. The U.S. is a favored region, and we see emerging market equities offering improved compensation for risk. In fixed income, we add U.S. government debt as ballast against late-cycle risk-off events. We prefer short- to medium-term maturities.
- In a total portfolio context, steer away from areas with limited upside but hefty downside risk, such as European stocks.
- We see a slowdown in global growth and corporate earnings in 2019 with the U.S. economy entering a late-cycle phase.
MARKET INTELLIGENCE REPORT FOR 2019: BE PREPARED FOR FINANCIAL BAZOOKA.
It would be one of the toughest years for the global economy where mettle of many investors/ policymakers / government comes under scrutiny from the global investors. In my opinion, a sub- par economic growth is coming to the market and looks inevitable. Either we will witness slow growth or zero growth in many economies. There are two key historical risk factors — inflationary overheating and asset market distortion — are showing their heads. Mark to market is going down by 40-50%in 2019 and can bring some discipline / stability to the global equity markets to be traded at fair value. Tempestuous times ahead. You are warned. Full stop
Omicron Variant: Implications on Global Economy
The prolonged battering of the Covid-19 has been considerably hitting the world economy. While vaccination and a receding in the cases of the cases in virus transmission has provided brief respite to the countries that are grappling with the recurring surge of the virus, the resurfacing of another virulent mutation termed as Omicron sounds ominous for the future of the world economy .Against this backdrop, this article projects the plausible economic ramifications of the new strand of the virus on the global economy.
The economic downward trajectory occasioned by the Covid-19 has been unprecedented in recent global history. While the economic depression of 2007-08 proved disastrous for the world economy, the toll emanating from Covid-19 pandemic and consequent economic stagnation has surpassed all the previous economic plunge .In fact, some analysts have gone to the extent of comparing the Covid-19 induced economic depression with the great depression of the 1920s.However, whether the far reaching repercussions of the Covid-19 on the global economy will be as momentous is still remains to be seen. Nevertheless, the profound economic jolt triggered by the Covid-19 pandemic is poised to reverberate across the world through shaping socio-economic and political events
The scar inflicted by a protracted economic recession owing to Covid-19 is apparent in the arduous path of economic rejuvenation in the western countries and eastern countries alike. Virtually every country is grappling with the toll that Covid-19 has incurred in the economy. The western countries are finding it difficult to retrieve the losses that Covid-19 has precipitated. Although the swift vaccination of the western countries at the expense of the developing countries has provided a fleeting lull in their battle against Covid-19,it seem however the virus has resurfaced with increasing virulence in order to offset whatever gain these embattled countries managed to garner in their fight against Covid-19.
The skyrocketing and unprecedented inflation of the western countries coupled with a plummeted consumer confidence has meant a prolonged period of stagnation of their economies. However, in the wake of vaccination induced temporary respite in the viral cases, the economies rebounded strongly from the pits of economic recession. However, these hard-earned gains will be reversed in the event of the advent of any new strand of the virus. Already, the delta variant which originated in India had triggered a spate of Covid-19 flare-ups in the United States and United Kingdom. Against this backdrop, the Omicron variant is set to aggravate the economic woes of the western countries and in turn the world.
While the western countries are reeling from economic stagnation, the developing and underdeveloped countries are confronting many abysmal realities due to their prevailing economic backwardness. Their economic plight has been lingering in want of adequate vaccination due to the apathetic stance of the western countries and global governance institutions .Therefore, while the western countries has rebounded from the Covid-19 induces economic predicaments, the difficulties confronted by the developing countries has continued unabated. While the influence of advanced countries and their less advanced counterparts in world-economy is inextricably tied, the callous attitude of the developed countries to the vaccination of countries in Asia and South Asia turn out to be sheer lack of economic prudence.
While western countries are considered as the economic hub of the world, it is however the developing countries on which the vital supply chains of the world economy hinges on. Therefore, the tardy pace of vaccination in these countries is prejudicial to the global economic stability. The economic ramification of the slow pace of vaccination is twofold for the world economy. Firstly, the slow vaccination hinders the revival of the economic activities in the developing countries thereby obstructing the supply chain of the commodities .This supply chain crisis has ripple effect in the western economies. The recent predicament of inflation and attending macroeconomic woes in countries like the United States and United Kingdom is manifestation of the supply chain crisis plaguing the world economy. Due to the paucity of commodities and raw materials, the prices of necessary goods has escalated in the western countries which has plummeted consumer confidence and triggered a vicious cycle of stagflation in the economy that is reminiscent of the 1970s when a similar crisis in oil supply has precipitated economic downturn in the western economies.
Secondly, the slow rate of vaccination also run the risk of allowing the virus to mutating to newer and much virulent variants and due to the unfettered communication as a result of globalization the emergence of any new variant doesn’t remain in the confines of any border rather proliferate like wildfire and precipitate global crisis. Therefore, the lack of vaccination or slack pace therefore has global repercussions. Therefore, it is judicious of the developed countries to concentrate efforts in contributing to the vaccination of the less developed countries which will yield good results for their economy.
The ubiquitous mechanism in battling Covid-19 remains one of containment that entails halting economic and other activities and insulating the countries from other countries through imposing border controls, curbs on air communication and other stringent measures echoing protectionist attitude. However, these measures are antithetical to the spirit of the globalization and global trade. While lockdowns and other protectionist measures yield temporary improvement in the Covid cases, it is not viable in the longer term. Besides, lockdowns have deleterious ramifications on the economy and further aggravate economic rebounding of the developed countries and developing countries alike. Therefore, efforts should be aimed at preventing the Covid cases rather than grappling with the Covid with a knee-jerk policy of improvisation. .
Moreover,Covid-19 has already occasioned far-reaching economic fallout in the world economy. Indications abound regarding the fact that the world economy is verging on profound and prolonged recession. Against the backdrop of ominous predictions and slackening growth and painful inflation of the world economy, the prospects of the world economy due the advent of a new variant remain mired in obscurity. It can be concluded that the economic repercussions of yet another novel variant will be momentous and will offset hard-earned growth of the countries .Unlike previous precedent of haphazard policy and knee-jerk policy solutions, this time around the countries need to undertake challenge much prudently and should concentrate all of their efforts aiming at universal vaccination of all countries so as to prevent the resurfacing of similar virulent viral strands.
A Good Transport System Supercharges the Economic Engine
The infrastructure bill in the U.S. has been signed into law. At the American Society of Civil Engineers (ASCE), they are celebrating the fruition of a couple of decades, at least, of hard work publicizing the decaying infrastructure and lobbying for a fix-it bill. Countless delegations have visited the White House and met with staff to present their case. And something for their efforts is better than nothing.
They also started a grading system, giving an overall grade — currently C minus, a notch above the previous one. The bill seeks improvement in roads, bridges and transit although it falls short of the ASCE estimates for what is needed. For example, the bill contains $39 billion for transit (ASCE grade of D minus) but there is a backlog of $176 billion that is needed. Given Republican opposition to spending and the compromises made to pass the bill, the administration got what they could — they can always fight for more later.
This opposition against infrastructure spending is somewhat incomprehensible because it generates jobs and grows the economy. Too much spending, too fast has inflationary potential but that is caused by too much money chasing too few goods, usually not when there is a tangible product — improved transit, roads and bridges in this case. And then there are also other ways of checking inflation.
This bill is a start but still a long way from having high speed cross-country electric trains as in other major industrialized countries. These are the least polluting and especially less than airplanes which emit six times more CO2 per passenger mile.
Why is the U.S. so lagging in high-speed rail when compared with Europe and Japan? Distances are one reason given although these are a function of time. No one would have thought of commuting 30 miles each way to work in the 19th century but it is not uncommon now for some to be quite willing to sit 45 minutes each way on a train for the pleasure of living in the greenery of suburbia.
The bill also includes $110 billion for roads and bridges. Unfortunately the backlog of repair has left 42.7 percent of roads in sub-standard condition costing motorists an estimated $130 billion per year in extra vehicle repair and maintenance. Some $435 billion is now needed to repair existing roads plus $125 billion for bridges, $120 billion for system expansion and $105 billion for system enhancements like increasing safety — a necessary improvement given a changing environment such as an increase in bicycle traffic. Allowing for round-off discrepancies, the total amounts to $786 billion (in the funding and future need section of reference). Increases in severe weather events have also had their effect, causing damage to roadways and further burdening the repair budget.
New technologies (in the innovation section of reference) like advanced pavement monitoring on key roads, using moisture and temperature sensors embedded in the roadway, now make it possible to assess pavements quickly without impacting road users. This leads to earlier repair and in addition new materials increase the life cycle. Much of this requires increased investment up front to take advantage of the new innovations.
Above all one can never afford to forget that a good transport system acts like a supercharger for the economic engine.
Another Look at the Prospects of a Eurasian Digital Platform
In view of the idiosyncratic features of Eurasia with respect to the gravity of distance, a common Eurasian platform for digital economic agreements may allow the region to attenuate the effects of distance and severe economic fragmentation — most notably in the regulatory sphere — emanating from the sheer size of Eurasia and the multiplicity of regional integration arrangements. By consolidating regional, bilateral, as well as corporate alliances, a common Eurasian digital platform would allow its members to introduce greater consistency and compatibility into the existing set of digital economic agreements, thus providing the conditions for multilateralising existing digital arrangements and for creating new digital economic accords.
One of the ways to create a digital “platform of platforms” for Eurasia that is to include platforms for regional integration arrangements, regional development banks and regional financing arrangements (RFAs) of the countries of Eurasia.
- The platform for regional integration arrangements would work towards advancing greater inter-operability into the digital platforms of Eurasia’s regional groupings such as the EU, the EAEU, ASEAN, RCEP, EFTA, BIMSTEC, SAFTA, GCC.
- The platform for regional development banks and funds such as EDB, EIB, ADB, EBRD, SDF, CAF would focus on building project portfolios in the area of digital cooperation/digital connectivity/digital inclusiveness and work to advance digital economic agreements (DEAs) on the basis of the existing digital arrangements concluded by countries such as Singapore.
- The platform for regional financing arrangements (ESM, EFSD, Chiang Mai Initiative Multilateralization, Arab Monetary Fund) would focus on the coordination of anti-crisis measures, the creation of ex-ante anti-crisis response mechanisms based on the use of “big data” and forward looking indicators obtained through digital cooperation and data exchange.
These three platforms can reinforce one another and can be further complemented by country-level and corporate-level platforms to form a Eurasian ecosystem of digital cooperation and inter-operability.
Such a Eurasian “platform of platforms” is:
- Digital: it advances digital cooperation, including digital trade at the level of countries and regions
- Regional: it places particular emphasis on building cooperation in areas that have hitherto lacked coordination, namely among regional integration arrangements and their development institutions
- Scalable: it can be replicated in other parts of the world as well as at the global level via creating a regional layer of global governance
The current economic framework in Eurasia is fragmented and lacks the digital connectivity that would be predicated on cross-country and cross-regional digital agreements. This in turn limits the capability of countries to coordinate policies in areas such as trade, migration, digital economy development. A common platform would address the issue of the “digital gap” across the countries of Eurasia via promoting greater “digital inclusivity”, most notably with respect to the low-income developing economies. Such a common digital platform for Eurasia may prove to be particularly important for land-locked developing countries that face notable geographical/logistic barriers to trade.
Indeed, of all of the different parts of the global economy Eurasia stands to benefit the most from greater digital connectivity and inclusivity, given the prominence of the “distance factor” that constrains the intensity of economic cooperation within the region. The gravity of distance is particularly costly for Eurasia’s land-locked economies — in fact Eurasia harbours 26 out of 44 (59%) of all of the world’s landlocked countries. Moreover, the scale of “inwardness” of some of the regions of Eurasia in terms of geographical location is truly unique, whereby Kazakhstan is the largest landlocked country in the world, while Bishkek is the farthest capital city from the coast in the world (all top-5 of the most distant capitals from the sea coast in the world are in Asia).
Existing research suggests that digital platforms may exert a sizeable effect in reducing the gravity of distance: as noted by Pierre-Louis Vézina, “distance between countries impedes international trade, but it matters 65% less for trade on the eBay platform than for traditional offline trade… The online world is flatter”. Yet another study focusing on the EU evaluated the importance of distance for e-commerce. This study of 721 regions in five countries of the European Union shows that while distance is not “dead” in e-commerce, there is evidence that express delivery in e-commerce reduces distance for cross-border demand.
Ways of measuring the effectiveness of a common platform would include the scale of liberalization and trade facilitation in digital trade across the Eurasian platform; increases in the size of the portfolio of joint investment projects related to the digital economy on the part of the region’s development institutions, increases in cross-border and cross-regional trade and investment associated with the digital economy. The number of multilateral digital economic agreements (DEAs) facilitated by the platform would be a measure of the contribution of the initiative to multilateralism. Another important metric is increases in connectivity arising from the creation of the platform — this would concern increases in digital connectivity/inclusivity, most notably in developing economies.
A common digital platform in Eurasia will serve to improve coordination across countries as well as regional integration arrangements and their development institutions. It will also serve to transform the landscape of trade agreements by facilitating the conclusion of digital economic agreements and multilateralising existing digital accords. The common platform will also advance international cooperation in the digital sphere and other areas pertaining to the Fourth Industrial Revolution to strengthen the response to the Covid pandemic and improve the region’s capabilities in the health care sphere as well as other areas pertaining to the development of human capital. A more cooperative framework for Eurasia that aims to emulate best practices and standards across the platform will also be conducive to longer-term cooperation, a more active use of ESG standards and greater emphasis placed on economic sustainability.
The creation of the Eurasian digital platform may be a step towards building a global network of cooperation on the basis of a “bottom-up” plurilateral cooperation among regional blocs rather than a “top-down” framework devised at the global level. Such an approach conforms with the principles contained in the WEF’s White paper on Globalization 4.0 that advocates the use of flexible plurilateral trade agreements as a way of further advancing trade openness in key areas, including in digital trade and e-commerce: “open plurilateral agreements of this nature are the most promising way available to update the trade rulebook without further fragmenting the world economy and weakening its crucial multilateral foundation”.
The formation of an open digital platform for Eurasia renders it amenable to replication at the level of not only regional arrangements, but also at the level of country-to-country cooperation as well as multilateral corporate platforms. An important aspect of the operation of such a platform is the principle of openness and inclusivity — whereby developing countries benefit from greater “digital inclusion” and the possibility to join digital alliances with advanced economies across Eurasia. In this way, the operation of such a platform contributes to a more sustainable and balanced economic paradigm across Eurasia.
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