What can possibly go wrong?

All uphill in 2021?

JK Galbraith was a wise man. To anyone looking for relevant, timeless texts on economics to read over the holidays I can recommend ‘The Great Crash’ and ‘The Affluent Society’. One quote from Galbraith that sticks in my mind at this time of year is that ‘the only function of economic forecasting is to make astrology look respectable’.

To a large extent, the events and ruptures of the past few years have made forecasting redundant. Forecasting is supposed to identify incremental changes or potential turning points, but as either an art or science is not well equipped to encapsulate the ripping apart of the order of things (history is a better guide). The coronavirus crisis has stretched reference points (for GDP, policy action, market stress and tragedy).

A further complication is that forecasting the direction of economies and markets is contradictory in the sense that there is no correlation between them. The best example I can find is that on Thursday the death rate across US hospitals sadly hit 3,000 per day, whilst the Nasdaq reached an all-time high. Morally, this is increasingly problematic.

Now, into this vast analytical chasm are thrown bundles of year ahead prognostics by banks, consultancies and journalists, at I am sure huge expense. There are at least two follies here One is the expectation that end of the calendar year wipes the slate clean in terms of the trends that have driven 2020, and that the world will change in January 2021.  The other is that economic size of the forecasting body is inversely proportional to the skew of the forecast.

Large banks for example, who want to try to preserve an air of respectability and who have armies of editors, compliance officers and marketing teams to denude documents of any intellectual colour, tend to produce very safe and slick year ahead document. Note that Galbraith also said that ‘It is far, far safer to be wrong with the majority than to be right alone’. Smaller outfits, and struggling writers, often adopt the opposite approach – the radical and improbable view might succeed by generating notoriety. I am glad I am not in the forecasting game.

Looking ahead and, certainly not forecasting the next four months will be dominated by the deepening of the coronavirus crisis into and through Christmas, followed by efforts to launch vaccines and then the unleashing of pent up demand for consumption, travel and business, the noise of which will produce an uptick in inflation. From there on, the outlook is unclear.

One approach I want to emphasise is to draw together the strands of new trends and events that have occurred this year, and that have already been mentioned in this missive – such as the notion of a ‘Quid Pro Quo’ (https://thelevelling.blog/2020/03/22/quid-pro-quo/) where stimulus measures from governments and central banks are balanced by changes in economic models (this has not happened), or the Biden Restoration (https://thelevelling.blog/2020/11/29/they-speak-french/) , and the prospect of the Roaring 20’s (https://thelevelling.blog/2020/10/17/the-roaring-20s/) .

They and other forces point to a range of new themes, four of which I want to quickly highlight here.

The first is what I call ‘empire builders’. In the aftermath of the Black Death in 14th century England, over 40% of the land changed ownership, a phenomenon that reminds us that after great economic dislocations and pandemics, the bankruptcy and asset cycle intensifies. Those with cash and access to capital (spectacularly so with SPACS (special acquisition vehicles) can build new ‘empires’ in the sense that they can put together new constellations of businesses and private asset portfolios, often cheaply.

The second theme is the rise of new financial eco-systems and assets. It is speculative to say so, but when at times 40% of US stock market trading is driven by retail investors, the real excitement in markets will centre around new, rising eco-systems – the crypto currency ecosystem, cyber security ecosystem (e.g. Palantir), the e-commerce ecosystem (e.g. PayPal) and the ESG ecosystem. As these eco-systems grow and thrive, the sectors they once inhabited such as the large banks, will continue to shrink.  

Then thirdly is what I call the Sisyphean economy. Sisyphus was a figure of Greek mythology, whose audacity was punished by the Gods through Sisyphus being condemned to push a boulder up a hill, only to have it roll down again. The (much overused) image of Sisyphus in economics is still apt in the sense that it describes the self-correcting tendencies of the many imbalances in our world such as the rivalry between the US and China, the over presence of central banks in markets and the huge load of debt in economies.

Consider for example if inflation rose, and some central banks started to debate monetary tightening – the high sensitivity of debt prices to this would produce a spike in market volatility, and potential halt in investment. This is how the financial system is supposed to work, but today it is spring loaded.

The last trend I wanted to mention, with the prospect of a post COVID ‘fresh start’ in mind, is the evolving new world order, but you will have to wait for next week for that.

Have a great week ahead,

Mike

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