Your Truly is a voracious reader of all literature connected to Developing Nations (for the purposes of this article Emerging Markets, EM will be used). Me thinks the only way to understand Turkey and neighboring countries, all of which are Developing, is to gain comparative insight. I spent my two-week furlough from report writing and website administering reading 2021 predictions and forecasts for EM.
It is very difficult to find a contrarian view. The iron-clad consensus with almost no dissent is that EM assets will outperform anything on the face of the Planet this year. Living in Turkey, where things go wrong each day and seeing how a callous authoritarian is busy destroying all institutions of democracy and market capitalism, I’m not a great fan of EM, because the same process is taking place in most of the countries I follow: India, South African Republic, Brazil, Argentina, Philippines, Hungary, Poland. Sustainable growth is hard to come by (the only instance is China) when building democratic and pro-market institutions don’t go hand-in-hand with monetary and fiscal policy.
Thus, I’m overjoyed in finding this article by Natixis Asset Management which explains what can go wrong to disrupt the consensus on world economy. Why it doesn’t directly apply to EM, we know EM goes where the Dollar Index doesn’t. So there.
Natixis: What could completely change the economic and financial equilibrium expected by the consensus?
- The economic and financial equilibrium that the consensus expects in OECD countries includes:
o An economic recovery following the availability of the COVID vaccine;
o The recovery being underpinned by fiscal and monetary policies that remain expansionary for a long time, with very low interest rates;
o Inflation that remains low;
o A rapid rise in asset prices (equities, real estate, etc.) thanks to expansionary monetary policy and abundant liquidity.
What factors could alter this equilibrium, leading to a very different situation?
o A return of inflation, if the forced savings from the COVID crisis are consumed, and if population ageing, the energy transition and reshoring are inflationary. Interest rates would then rise, borrowers would be in trouble and asset prices would fall;
o A change in wage policy, with a rapid rise in low wages in particular, leading to inflation, but also a decline in global savings due to the disappearance of excess corporate savings. However, the global savings surplus (ex ante) is one of the causes of the low level of interest rates;
o A change in central banks’ strategy, if they decide to fight asset price bubbles and move to a more restrictive monetary policy despite low inflation.
While completely agreeing with the Natixis reasoning, Me humbly thinks the world will not recover completely in 2021 or 2022, even if vaccination is an absolute success, because of the “scarring effects”, e.g. rising structural employment, global geo-political uncertainty depressing private capital investment and of course the “known unknown” none of us can pin down: What has humanity learned from this tragedy? Will be pollute, dine out, shop, travel and go to our work cubicles daily as we did before the pandemic? My gut tells me some people will pretend nothing has changed, but a substantial minority will change their behavior, so much so that tourism, entertainment, brick-and-mortar retail and civil aviation won’t recover for 4-5 years.
A mediocre recovery is very likely to trigger corporate insolvencies, as parliaments rebel against spending more and money printing runs into the asset bubble problems.
Deflation instead of inflation and a chronic underemployment equilibrium a la old-school Keynesian theory are giving me more stomach acid than a “V” followed by fiscal and monetary entrenchment.
Damon H Grande
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