Weather forecasters have a thankless job: it is often difficult to get an accurate prognosis even two days hence, and then they get blamed for being wrong. Yet some climate alarmists, rightly or not, predict with certainty what global temperatures will be one hundred years from now. But there is an awful lot of uncertainty between now and then.
The trouble with the future is that it’s unknowable. And investing is all about the future.
What a first half it’s been for capital markets! Global equity and debt capital markets have lost a cumulative $31 trillion. The main American index, the S&P500, is down 20% from its high, the Nasdaq, where tech darlings are listed, is down 30%, and bonds have experienced their worst episode since 1994. Many investors are wondering if the worst is over.
Markets deal with the allocation of capital. When the markets are function-ing effectively, they allocate capital efficiently based on the associated risks at the right price. When they don’t work – because of crises, shocks, or distortions – there are consequences.
One of the cornerstones of the past fifty years has been the financial architecture based on the ‘petrodollar’. This is where oil producers sell their product to the world in exchange for US dollars. These dollars are then invested in dollar-denominated assets and markets, explicitly supporting the US dollar as the world’s main reserve currency. Most commodities are also priced in dollars.
Many nations – from allies such as France, to the non-aligned such as India, to hostile states such as China and Russia – chafe under this financial system. The dollar’s dominance is now being openly challenged as the world bifurcates into pro and anti dollar factions.
Lately investors have been wondering about the effects of the US Federal Reserve’s “tapering”, a slowing of its $120 billion per month bond buying programme (Quantitative Easing). QE has added more than $4 trillion to the Fed’s balance sheet, which stands at $8.7 trillion. QE provided unprecedented support to financial markets but the Fed is now reducing its covid stimulus, making the fixed income market jittery. Ironically, tapering could actually be good news for the bond market.
What follows runs contrary to today’s “persistent inflation” narrative.
