Did I miss anything?

In early March, Daniel Thorson who works in a ‘mindful learning’ centre in Vermont went on a seventy five day silent retreat. When the retreat ended in late May, one of his first acts on reconnecting with society was to tweet ‘Did I miss anything? What about the Australian wildfires?’

He may well wish he had not broken the tranquility of his retreat, given the flood of extreme events we have witnessed this year from the assassination of an Iranian commander, to the suppression of democracy in Hong Kong to the odd combination of double-digit unemployment and record highs for stocks.

The latest such event this year, the tragic explosion in Beirut last week, has amongst many other things contributed to a sense that 2020 is an inordinately event rich year.

The logical, in my view, explanation for this is that many of the tectonic or volcanic shifts that have been slowly building in recent years, are now surfacing, and in particular have been catalyzed by the coronavirus crisis.

Climate damage is one such risk whose side-effects are now more and more manifest. To also take Lebanon as an example, long running geopolitical tensions, profound corruption and a dysfunctional bureaucracy have already spurred a debt crisis in Lebanon, and now they have combined to produce a more deadly crisis.

In this sense, 2020 is a turning point, and a great stress test of the world order. With the holidays (at home!) now upon us, its not a bad idea to look back and trace the trends whose rise has been exacerbated by the coronavirus crisis, and those are just now starting to become apparent.

In brief – because I have covered these topics in detail in recent posts, 2020 has seen globalization well and truly crashed by the coronavirus crisis, and replaced by an emerging multipolar world the signature elements of which are the lack of collaboration between the large regions (EU, China and US) and their increasingly different responses to economic policy, democracy, and the internet to mention a few areas. Economically, the dominance of central banks has been augmented, indebtedness has risen towards levels (relative to GDP) not seen since the end of the Napoleonic Wars.

This means that at very least, the idea of the economic cycle is dead. Markets, investment and economies will orbit around the contest between central bank death stars and the gravitational pull of credit risk. There are two implications for markets. One is that extremes in inflation or deflation will be found in asset prices rather than in real economies. Relatedly, it will be some time before we understand how 2020 has scarred consumer preferences (and savings habits).  

Second, it means that investors will increasingly seek out ‘new assets’ (new assets are really old assets whose ownership and risk characteristics have been adjusted) that are created through new types of debt issue (such as EU bonds), distress and bankruptcy, asset sales from restructurings and then more inventive securities in sectors like healthcare and biotechnology.

One of the other important discoveries of 2020 is the disparity in policy and adaptability between countries. This was evident across Europe, and tellingly across states in the USA. Europe has however emerged stronger from the crisis, or the knee jerk reaction that the European project would fall apart has been proven wrong. In contrast the US has emerged weakened and arguably more divided.

To a certain extent this has been reflected in recent dollar weakness. A glance at Turkey gives a good illustration of how the degradation of a country’s institutions can translate into diminished financial credibility (the lira has fallen sharply this year). The rule of law has rarely been a factor in markets, but in developed countries like the US, sustained attacks on institutions and the rule of law can have economic consequences. Here, while falling interest rates have also helped to push the dollar lower, a sustained crisis of confidence in the US (and its currency) is one of the risks to watch into the second part of the year.

The post holiday period is very likely to be filled with noisy predictions on the shape of the economic recovery, and the outcome of the US election. My instinct is to continue to track the outcomes associated with a multipolar world (i.e. Europe regulates tech, builds a green economy but fails to drive banking consolidation and a capital markets union), the financialization of everything (healthcare is next after technology) and the accelerated rise and fall of nations.

I’m taking a ‘silent retreat’ of my own from this missive and it will return on August 30th.

With very best wishes


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