The new normal

Covid-19 is here to stay. The world is working out how to live with it

People will have to change their behaviour to prevent second waves of the virus

You may be exhausted but the covid-19 pandemic is barely getting started. Six months after Chinese scientists notified the World Health Organisation (who) of a new virus that caused deadly pneumonia, covid-19—as the disease was later dubbed—has spread to almost every country around the world and killed more than 500,000 people.

In London, Madrid and New York deaths this year have been more than twice what they usually are in the same months. It took more than three months for global cases to reach a million; the last million came in less than a week.

Yet even in the countries with the worst outbreaks, just 5-15% of people have been infected. They may be immune to future infections, at least for a while, but with most of the population still susceptible, getting back to life as usual is impossible. The disease would again grow rapidly. Hospitals would soon be overwhelmed.

A recent study published in the Lancet, a medical journal, estimates that about 4.5% of people infected by covid-19 globally are likely to become so ill they require hospitalisation. By comparison, less than 8% of Americans have to stay overnight in hospital in any normal year.

A vaccine is the best way out of this. But even the most determined optimists reckon it will be at least January 2021 until one becomes widely available. In the meantime, the world is preparing to cope with covid-19 in the long term. As countries loosen restrictions and open borders, cases are starting to rise again.

If left unchecked, they will swell into new waves of infection. All-encompassing national lockdowns would wreck economies. So countries are looking for middle-ground measures that will prevent the disease from overwhelming hospitals while loosening some of the heaviest restrictions. Used together, these measures will probably ward off new waves of infections.

Whether governments will choose to implement them—or have the means to do so—and whether people will follow new rules is less certain.

The priority is to shield from infection those who are most likely to become gravely ill. That becomes difficult if large numbers of people are becoming infected. To prevent the virus from spreading uncontrollably, governments are relying on a combination of three key measures: testing and quarantine; changes in behaviour that reduce transmission (which include social distancing, the wearing of masks and handwashing); and targeted lockdowns of outbreak hotspots—a practice known as a “circuit-breaker” that has been popular in East Asian countries thus far and is now being embraced elsewhere.

Whether countries that have got a grip on covid-19 experience new waves of the disease will depend on how people behave and how quickly authorities can detect an increase in cases, says Andrea Ammon of the European Centre for Disease Prevention and Control (ecdc). If authorities can quickly identify new outbreaks, they will be better able to prevent them from spreading. That means any restrictions imposed in response can be more limited. “What we’ve learned about this virus is that we shouldn’t underestimate even a small outbreak. It can easily be the core of bigger transmission,” says Dr Ammon.

Countries facing their first waves of covid-19 were caught off guard. One of the biggest tragedies was the failure to protect the residents of care homes. They have accounted for about 40% of covid-19 deaths in America and in several other Western countries. Governments are determined to avoid a repeat of this debacle. Infection-prevention measures at care homes are being ramped up, including more testing and greater use of masks by staff and visitors.

Besides the elderly, it is now apparent that people with certain health conditions—including obesity, diabetes and heart disease—are particularly vulnerable. Estimates suggest that 22% of people globally have at least one underlying condition that puts them at high risk if they are infected. In America 38% of adults fall into this category because of their age or health problems; nearly half are of working age.

What are the odds?

Ensuring people understand how to assess their own risk—especially in the event of an outbreak in their area—is crucial. In March Britain’s National Health Service sent letters to some 2.2m people deemed to be at particularly high risk, telling them to avoid going out when the outbreak was at its worst.

In future doctors and patient organisations will be more closely involved, advising vulnerable people and their families on how to balance reducing their risk of contracting covid-19 with their need for some degree of social life.

In the early days of the pandemic, almost all countries tried to “test, trace and isolate” those infected in an effort to quarantine them and break chains of transmission. But many governments, such as Britain’s, abandoned this approach when case numbers grew rapidly and they did not have enough testing capacity and staff to do the job. Panicked countries in Europe and elsewhere imposed national lockdowns in an effort to prevent hospitals from becoming overwhelmed.

But the places that did best in the first months of the pandemic are those that never stopped contact-tracing, says David Heymann of the London School of Hygiene and Tropical Medicine.

They include countries as varied as South Korea, Denmark, Germany, Vietnam, Uruguay and Rwanda. Many European countries and some American states used their initial lockdowns to expand their testing and contact-tracing systems and build apps that could make it possible to carry out the task more efficiently if there is a second wave.

These improved systems have responded with varying degrees of success. In Spain the health ministry believes it is still only detecting around a third of all cases (which does, however, mark an improvement on its rates of about 10% at the start of the country’s epidemic). Of these, 40% have no known link to other infected people. Public-health professionals say the system needs more staff if it is to function effectively.

Contact-tracers in some states in America are reaching fewer than half of those testing positive for covid-19. Apps that notify users about a close contact with an infected person have often proved disappointing. The one in France was downloaded by fewer than 2m people and notified only 14 of them that they had come into close contact with someone infected with covid-19 in the first three weeks.

Some of the governments that scaled up their contact-tracing systems significantly during the outbreak, such as Britain, chose to run them centrally. That proved to be a mistake. Success rates in obtaining details of contacts and getting in touch with people have turned out to be higher when the task is done by local health departments or community organisations.

Persuading someone who has just tested positive for covid-19 to hand over the phone numbers of friends, family and co-workers is hard. They are more likely to co-operate if the call requesting such information comes from someone with the dulcet tones of a local.

“Every epidemic is local,” says Madhukar Pai, an epidemiologist at McGill University in Canada, “so a combination of local leadership, local data to track what is happening, and a local army of community health workers and volunteers is absolutely critical to get it under control.” In countries as large as India, he says, the success of different places in keeping covid-19 at bay will vary. Cases of covid-19 in India and deaths from the disease are rising precipitously.

But Dharavi, a slum in Mumbai where 850,000 people are packed into 2.5 sq km and as many as 80 people share each toilet, has tamed an outbreak that began in April. Authorities there set up clinics to check people’s temperatures. Health-care workers went door-to-door to screen people for symptoms and moved those who were infected to nearby schools and sports grounds which had been converted to quarantine centres. In the first half of June the slum had only six deaths from the disease, compared with 71 in April and May.

The process of tracing the contacts of those infected with covid-19 has been less smooth in Europe and America. As a result, other measures to curb transmission are even more vital. These include encouraging people to wear face-masks and keep their distance from others (social distancing).

Turning these things into social norms, however, has been tricky for a variety of reasons. For one, the official advice on masks in America and Britain, among other countries, changed over time. People were initially discouraged from wearing them, partly for fear that they would run down the scarce supplies for health workers.

In America masks are now officially recommended but have become a political statement, with some supporters of President Donald Trump, who refuses to wear a mask, following his lead.

Thanks to studies of outbreaks around the world, it is becoming clearer where social distancing matters most. Covid-19 thrives on close contact. Four things are now known to exacerbate its spread: being at close quarters for a prolonged period of time, in a large crowd, and taking part in activities that lead people to breathe out forcefully (for example singing, shouting and heavy exercise).

In combination these create “super-spreading” conditions. Early in the pandemic, at a choir practice near Seattle, one person infected with covid-19 passed it on to more than half of the 61 people in the room, two of whom died.

Such discoveries are helping officials come up with more targeted rules. Conferences and big events are already banned in many places for the foreseeable future. As Britain emerges from its lockdown, weddings are allowed again–but without singing and with no more than 30 people present. Sweden’s drinking holes are allowing table service only, to prevent punters jamming together at the bar. The future of indoor exercise classes looks wobbly.

The extent to which people will comply with rules about wearing masks and on everyday social distancing will depend on how and from whom they get the message. Dr Ammon of the ecdc says that explaining the risks of covid-19 is a challenge for all public-health authorities because they have never had to do it on such a scale. “But we’ve learned from other settings that you need to win over the influencers in certain groups to convey the message in a credible way.” Precisely who those influencers are will vary.

The exhortations of online celebrities will carry more weight with young people. Those of imams and priests may convince religious types. But the messaging must start at the top. “Politicians have to convey the message to people that it’s really up to them to decide what’s happening with this pandemic,” continues Dr Ammon. “And in a way empowering them by saying: ‘What you do actually matters’.”

But in many countries, including America, Brazil, Russia and Iran, politicians have lost the trust of their people by contradicting their experts on basic facts about the pandemic, publishing implausible numbers on covid deaths or propagating conspiracy theories.

Pushing people to change their behaviour swiftly is increasingly important in poorer countries with fast-growing epidemics. In India and South Africa shortages of tests—because of crimped global supply—are already rendering contact-tracing less useful. In South Africa, which has largely abandoned tracing, the buzz-phrase among political leaders now is “from anxiety to agency”.

Officials are trying to boost adherence to the most basic things to prevent the spread of covid-19, including wearing masks, now compulsory on public transport and in all shops. President Cyril Ramaphosa made a point of (clumsily) putting one on at the end of a televised speech. “We now need to change the mindset of people,” says Salim Abdool Karim, who chairs South Africa’s medical advisory committee on covid-19.

We need each person to see that they have the ability to change, to influence their own risk. That for me is the biggest challenge.”

The worry in poor countries, says Dr Pai, is that such messages may fail to sink in if people see the disease spreading. Already, he says, there are people who think there is no point in wearing a mask because they will get the virus anyway.

It is hard to predict how behaviour will shift in any particular country. Past experience shapes attitudes. Many experts think that levels of compliance with guidelines about masks, quarantine and social distancing in Asian countries are high because people there have painful memories of the sars epidemics in 2003-04.

But there are signs that in parts of Europe and America that have come through their first big wave of covid-19 people may comply with new rules that will be in place even as restrictions ease. In France President Emmanuel Macron said that even he was surprised by the extent to which his fellow citizens obeyed new rules.

During the first few weeks of their lockdown, the French watched as pale-faced doctors emerged, night after night, from emergency wards into television studios to tell the nation that France was at the base of a ghastly wave. Fear, backed up by hefty fines and strict policing, probably contributed to this collective discipline.

Although French cafés, museums, beaches and schools have reopened, the country’s earlier experience may explain why rules such as wearing masks on all public transport, in offices and other shared indoor space, are for the most part still being obeyed.

The mood is similar in Spain, which had one of the worst early outbreaks. During its first wave, the country saw at least 28,000 deaths, according to the health ministry. The number of excess deaths was roughly 50,000 compared with previous years. “We can’t lower our guard,” said Pedro Sánchez, the prime minister, on June 20th, as he lifted a 98-day state of emergency.

As they contemplate taking longed-for summer holidays, Spaniards are torn between a desire to return to normal and fear of renewed outbreaks. Most now wear face-masks outside. Madrid’s and several other regional governments have provided some masks free of charge through pharmacies; they are easily obtainable in shops.

But even as people take these precautions, they are desperate for life to return to something like normality. Spaniards generally respect social-distancing norms. But on Thursday and Friday evenings the outside terraces of bars throng with mainly mask-less young people. Beaches are open again, though police move in to break up crowds. In Britain partygoers have already been caught at illegal raves.

The police and hospitals are bracing themselves as British pubs prepare to open on July 4th. In Berlin, where masks are mandatory in shops and on public transport, the local government imposed fines for non-compliance when numbers wearing them fell.

Cluster headaches

In many European countries new covid-19 cases have crept up as restrictions have eased. So far cases have appeared in clusters, often linked to parties or other celebrations where people have gathered in large numbers. But the biggest clusters have often been among migrant workers. In Britain, Germany, Spain and Italy migrant workers from Africa and eastern Europe often live in cramped accommodation.

A lot of them work in food-packing factories—loud places where workers stand close to one another, often yelling to make themselves heard over the clatter of machinery, creating ideal conditions for the virus to spread. Many are not fluent in the local language and so struggle to understand messages about preventing the spread of covid-19 or to get in touch with doctors if they become ill. Public-health authorities are now more aware of the problem and making greater use of translators.

But such outbreaks are being exploited by politicians. On June 29th the leader of Italy’s hard-right Northern League, Matteo Salvini, was forced to abandon a rally at Mondragone near Naples after being drowned out by chanting demonstrators. They were protesting at what they saw as his attempt to capitalise on clashes the previous week between Bulgarian seasonal workers and native Italian residents.

Most of the Bulgarians, who gather local harvests, live in a complex of apartment blocks that on June 22nd was returned to lockdown after becoming a hotspot of the virus. Almost 50 residents tested positive and were put into isolation in a nearby hospital. Refusing to accept this renewed confinement, some of the Bulgarians marched through the town, defiantly unmasked, prompting criticism and even attacks by locals.

On June 12th, a less visible revolt took place inside a former barracks housing asylum-seekers outside the northern town of Treviso. In both cases, the reason was the same: the immigrants’ fear that they would lose their jobs if they failed to turn up for work.

Such patterns have laid bare one of the gnarliest problems facing all governments. Convincing people to change their behaviour in the ways needed to prevent new waves of covid-19 will rely on people worrying about others as well as themselves.

In most places the disease has become one that threatens the elderly, the poor and marginalised minorities. But beating back a virus that has spread around the world with such ferocity will be impossible unless most people play by the rules of the new normal.

A wave of liquidity will continue to wash over emerging markets

Big tests await but many Covid-19-stricken nations have been able to raise money cheaply

Jonathan Wheatley

Brazil was among the growing number of EMs able to tap global capital markets this month © Bloomberg

Emerging markets have rallied sharply from the panic-fuelled sell-off at the end of March, but not by as much as developed markets. This may reflect the evidence that, with the exception of a few countries, the number of coronavirus infections is still rising in the developing world even as it falls in advanced economies, and that developing countries are set to suffer the greatest economic damage.

Of greater significance to investors, however, is the tidal wave of monetary stimulus from the US Federal Reserve and other central banks, which arrived in emerging markets after sweeping through other classes of assets.

Not everyone wants to ride this wave. Arthur Budaghyan, chief emerging market strategist at BCA Research, describes what is happening as a “FOMO-driven mania”. With markets pumped up on trillions of dollars of liquidity, fear of missing out is driving US retail investors to bet their stimulus cheques on companies apparently heading into bankruptcy.

Institutional investors, he said, have had little choice but to join in, and their thirst for yield has driven portfolio flows back into emerging markets after they experienced record-breaking outflows in March.

“This rally is close to the end and it would be very dangerous to chase it,” Mr Budaghyan told clients on a recent call.

This mania could persist, he said, “but manias are not driven by fundamentals and rational forecasters cannot forecast them.”Others see good reasons to join the rally right away.

Uday Patnaik, head of emerging market debt at Legal & General Investment Management, said the late-March sell-off was a “tremendous buying opportunity”, and one that was still open. “In the second half of this year, we still think EM debt can generate high returns and we remain constructive,” he said.

Backing that claim is the current wide gap between yields on emerging and developed market sovereign bonds, which he expects to narrow this year.

But which assets to buy? As private individuals, many investors have been appalled by the nonchalance with which Jair Bolsonaro, Brazil’s president, has addressed — or not addressed — the pandemic. As investors, however, they seem undeterred by the costs of that negligence.

Brazil was among the growing number of EMs able to tap global capital markets this month, selling $3.5bn of five and 10-year bonds at lower interest rates than expected.

Investors were reassured by the size of Brazil’s foreign currency reserves and its low level of foreign currency debt. Similarly, Egypt and Pakistan have been able to get eurobonds away thanks to the backstop of the IMF. The big test of risk appetite, according to Mohammed Elmi, portfolio manager in EM fixed income at Federated Hermes, “will come when we see real EM corporate issuance, frontier sub-Saharan issuance, or troubled core EM sovereigns such as Turkey and South Africa”.

Meanwhile, one bottom-up approach is to look for “good companies in bad countries”, said Michael Israel, a founding partner at IVO Capital Partners, a French boutique specialising in corporate debt that manages about $1bn in assets.One basis of this strategy is that no matter how strong a company’s balance sheet, its credit rating will be limited by the sovereign rating of its country.

This lowers the price of its bonds.Another is that a well-funded company in an emerging market, whose cash flows are relatively undamaged by the crisis, is a better prospect than one that has to load up on debt to keep trading.

In a market functioning normally, he argues, good and bad companies will be differentiated by the quality of their balance sheet and management. But in markets protected by the Fed’s quantitative easing, especially when delivered en masse and at speed, there is no opportunity for such distinctions to emerge.

“There is a big difference between liquidity provided to avoid a short-term default risk, and liquidity provided to address a solvency risk,” he said. “The more your solution to a liquidity problem is to add more debt, the more you increase in parallel the solvency risk. The only way to avoid this is through an equity injection.”

It is hard to resist making an analogy with sovereigns and to conclude that what emerging markets stricken by the pandemic need is not more debt or even debt relief, but outright grants.

But the tide of Fed liquidity may yet make such arguments moot. Data from CrossBorder Capital, a consultancy, show that the relationship between global liquidity and financial asset prices has been close for three decades. After the trillions injected since March, asset prices still have ground to make up.

As Oxford Economics noted on Friday, “The experience of the last three months suggests that in sufficient size, liquidity is capable of offsetting most economic risks.

That may increasingly be the case for EM asset classes.”

Why the Widening Wealth Gap Is Bad News for Everyone

By Reshma Kapadia

Illustration by Doug Chayka

The one-two punch of the worst health crisis and economic downturn in decades has brought to the fore an issue that has been simmering for decades: an increasing income and wealth disparity among Americans. This widening gap has long-term economic implications and threatens the sustainability of the stock market’s recovery.

This isn’t a fringe idea: Federal Reserve Chairman Jerome Powell noted that the current downturn “has not fallen equally on all Americans,” and in congressional testimony this past week he warned that if the job losses and economic fallout seen so far were not contained and reversed, “the downturn could further widen gaps in economic well-being.”

That matters to investors, especially now, as the focus is on the shape of the recovery as the U.S. emerges from the coronavirus pandemic. When a large group of the population is in economic distress, their spending is limited. And spending is what drives the economy, corporate earnings, and, ultimately, the stock market.

Economic disparity also creates deep divides, which increase political risk for investors and opens the door to potential tax and regulatory changes that can weigh on corporate earnings. Economic inequality is nothing new, and the human costs through generations aren’t easily quantifiable. But there is a growing consensus that rising income inequality and the wealth gap will play a crucial role in the strength of the economic recovery.

Markets are notoriously myopic, shrugging off civil unrest, geopolitical flare-ups, and even 9/11. Chronic problems like inequality are even easier to ignore. Indeed, the market’s 40% rebound from its March lows after the pandemic took hold declares “not my problem,” even as 20.5 million people have lost their jobs, the Covid-19 death toll reaches beyond 115,000, and the widespread protests spurred by the killing of George Floyd while in police custody in Minneapolis enter their fifth week.

“It does appear that the markets don’t really care terribly much about these kinds of longer-term, slower-burn issues, but ultimately they create a fragility in the system,” says James Montier, part of the asset allocation team at $60 billion Boston-based money manager GMO.

“Rising inequality is a breeding ground for all kinds of concerning things. You are muting the bottom 90%’s ability to spend. This causes secular stagnation, and that matters for investors because it matters for interest rates, stock market valuations, and long-term returns.”

In recent months, stock investors have been reassured by the federal government, which has taken unprecedented steps to dampen the immediate fallout from the pandemic. The Federal Reserve has supported markets with low interest rates and other unconventional measures, such as expanded bond-buying.

One-time payments of up to $1,200 were sent to roughly half of Americans, and enhanced federal unemployment benefits meant that more than half of households received weekly payments larger than what they were bringing in prepandemic. But the extra unemployment payment is due to expire at the end of July. Meanwhile, many smaller businesses have had trouble accessing the $650 billion in federal loans offered.

“If we don’t have a renewal or another way to get jobs back, we could end up back to near where we started,” says Deutsche Bank’schief economist, Torsten Sløk.

But where we started isn’t where economists and investors want to be. Low-income workers have seen very little wage growth since the last recession: The top 1% of earners now account for a fifth of total income in the U.S., while the bottom half of earners account for just 13% of total income.

Savings rates for the top 10% have risen over the past three decades, while the other 90% has seen negative savings rates, leaving those earners with little to invest and often saddled with debt.

And while a little more than half of U.S. households own some stock, usually through 401(k) plans, just 10% of households own 84% of the stock market, which means a swath of Americans didn’t reap the benefits of the last bull market.

The Covid-19 pandemic exacerbated and highlighted these problems. Some 40% of the people who have lost their jobs were earning less than $40,000, compared with 13% of those earning $100,000 or more.

On its face, income and wealth inequality is a natural byproduct of a healthy capitalist system.

But when inequality of any kind gets exaggerated, it has broad repercussions—and by multiple metrics, wealth inequality has made the U.S. an outlier among developed nations. The U.S. middle class now makes up roughly 50% of the population, putting the nation closer to countries like Russia and Turkey, rather than Japan, France, or Germany, where the middle class makes up more than 60% of the population. The bottom 80% of earners have lost share of total income, wealth, and consumption since 1989, according to the Federal Reserve.

Economic inequality has been building over decades, fueled by structural racism and inequalities in the U.S. educational, financial, and health-care systems. Also at work: a shift toward prioritizing shareholder value over other corporate stakeholders—such as employees and customers—that began in the 1980s, says Robert Gordon, professor of economics at Northwestern University.

The emphasis on stockholders above all else meant that the last couple of bull markets disproportionately benefited Americans who owned stocks—the majority of whom are white and wealthier. (See “Wealth Inequality Doesn’t Show Up in Broad Economic Metrics, Masking the Fragility of Our Current System.”)

Inequality looks even more stark through the lens of race: Black households headed by a college graduate had 30% less median wealth than white families headed by someone with no college degree. The gap was striking even among the top 10% of African-Americans, who had roughly a fifth of the wealth of their white peers.

Intergenerational transfers of wealth—not just inheritances but also paying for college or down payments for homes—drives much of that gap, says Trevon Logan, an economics professor at Ohio State University.

Wealth provides a safety net. It allows people to take risks—with their investments or their careers. “Wealth begets wealth, and if you don’t have it, you don’t have means to withstand a shock,” says Andre Perry, a fellow at Brookings Institution.

What Inequality Means for the Economic Recovery

Inequality matters to investors trying to gauge whether the economic rebound will have a V shape, or a U, or a W. The latest entry to the recovery alphabet is the confounding K. Some economists see a two-pronged recovery: first, a strong, almost V-shape recovery among the haves, who can work from home and are spending on furniture and cars now, and will resume further spending once the health concern has subsided.

For those who have lost jobs or income—the other leg of the K—it could be a much more difficult road ahead. Layoffs have hit lower-income workers hard; about half have lost their jobs or had their wages cut. Hard-hit sectors like leisure, transport, and retail are filled with part-time and lower-wage jobs that generally don’t come with safety nets like paid leave, health care, or work-based 401(k) savings plans—and many of those jobs might not come back.

Lower-income workers face another threat. Many are on the front lines, processing meat, caring for the elderly, delivering packages, and stocking grocery stores, so that others can shelter and work from home. What’s more, recessions have seen a surge in low-skilled men dropping out of the workforce—a trend that persists and contributes to elevated earnings inequality long after a recession ends, according to a paper by Jonathan Heathcote, a monetary adviser at the Federal Reserve Bank of Minneapolis.

In a consumer-driven economy, lower-income households are a critical source of growth because they are more likely to spend any additional money they get. According to a working paper by the Chicago Fed in May, those who lived paycheck-to-paycheck spent more than two-thirds of the recent $1,200 relief checks within two weeks, while those who save much more of their monthly pay spent less than a quarter.

“Economic history clearly shows that the strongest, most durable periods of economic expansion in most countries occur when the middle class expands,” says Abby Joseph Cohen, senior investment strategist for Goldman Sachs.Indeed, investors have made lucrative returns investing in such companies as Nike(ticker: NKE) and Nestlé(NSRGY) that have benefited from expanding middle-class spending in countries such as India and China.

But the middle class in the U.S. has shrunk, accounting for a smaller share of the population than other rich countries. It’s also getting harder to move up the income ladder: It takes five generations for a person born to a low-income family to get to their society’s median income levels, according to simulations run by Deutsche Bank and the Organization for Economic Co-operation and Development.

Covid-19 could reduce social mobility further: Early data from Zearn, a math program used by some schools for distance learning during the pandemic, showed children in high-income areas experienced a temporary reduction in learning but soon recovered, while children in lower-income areas have remained 50% below baseline levels, according to a paper co-written by Harvard economist Raj Chetty, who is also a director of nonpartisan data project Opportunity Insights.

The Fed allowed interest rates to stay low even as the economy started heating up a couple of years ago, in an effort to get more people working and to improve mobility, and that’s why rates will probably stay low for the foreseeable future. That provides a safety net for stock investors and could keep the market afloat for a while. But the bill will come due—literally, as policy makers grapple with the national debt passing $25 trillion, and figuratively, as the stimulus, at least in its current form, doesn’t do much to address the fractures created by inequality.

“We are hearing the overall social fabric in the U.S. tearing in many different ways—racial injustice, poverty, income, and wealth inequality,” says Daniela Mardarovici, who oversees $15 billion as co-head of U.S. multisector and core plus fixed-income strategies at Macquarie.

So what’s the solution? In a word, taxes. “It’s hard to see where things change without taxes. The pendulum on inequality swings to revolution or tax policy. It’s a short menu,” says DataTrek Research co-founder Nicholas Colas. He doesn’t expect a revolution; civil unrest usually stems from a combination of a high Gini coefficient (a gauge of inequality) with a low average population age, he says. “The U.S. has high inequality, but also a high average age, so you probably get some political problems, but not massive unrest.”

Many other strategists and economists agree that the biggest risk is political. “If a bigger and bigger group is losing out in terms of health, income, or wealth inequality, there’s a rising probability that the average voter will begin to have different views on how society should be organized,” says Deutsche Bank’s Sløk. “Tectonic plates are shifting underneath.”

A social reckoning could increase calls for more-redistributive policies, such as rolling back the 2017 corporate tax cuts that juiced the market, or higher taxes on the wealthy, such as higher income or estate taxes, though few expect a wealth tax.

Change could also come through measures outside of the tax system, like infrastructure spending; giving companies incentives to spend on investments in the parts of the economy that most need jobs to come back; or tying additional government stimulus to commitments to offer paid leave or raise wages for a wider swath of workers, says Ohio State’s Logan.

“We don’t have this magic lever that says, ‘Open the economy back up,’ ” Logan adds. “We now see how interconnected all these things are, and how little the nation has addressed them.”
What Inequality Means for Portfolios

As interconnected as all of these strands are, that connection hasn’t always been clear enough for investors to incorporate into their financial analysis. But smart long-term investors have always paid attention to trends that play out over decades. Whether it is the promise of fifth-generation, or 5G, cellular networks, the disruption of companies like (AMZN) and Tesla(TSLA), or the long-term decline of bricks-and-mortar retail, investors have always factored secular changes into their earnings projections and valuation calculations.

Economic inequality can be viewed through a similar lens. As the U.S. emerges from the pandemic, inequality will weigh on the factors that investors care about most deeply: the scope and pace of the economic recovery, the outlook for corporate earnings growth, and ultimately the political fallout, which could affect tax policy, the regulatory environment, and other systemic changes.

As investors think about how inequality can manifest in their portfolios, the first place to go is taxes. Specifically, they can increase the tax diversification among their accounts, a good move in light of a rapidly growing deficit as well as the increased momentum to address wealth inequality.

Investors should use as many tax-advantaged accounts and tax-efficient strategies at their disposal: 529 plans for education, Health Savings Accounts for medical expenses, and Roth IRAs all allow for tax-free withdrawals, provided all rules are met. Open a tax-deferred retirement account for a side business. Look at tax breaks for solar panels and other home improvements.

A rising deficit could eventually mean inflation and higher interest rates. But for now, rates are expected to stay low. “That has implications for those who need to generate income—whether an institution or a retired couple—because you can’t do that with Treasuries,” says Brian Nick, chief investment strategist at the $1 trillion Nuveen.

It also makes diversification harder, as asset classes become more correlated. That means investors could feel forced to take on riskier strategies. “There is no silver bullet for diversification,” Nick says. Hedging is one option, he says, though that can be costly; adding some real estate is another. This is also when stockpickers should shine, as the outlook for companies diverges coming out of the pandemic.

“This is a small-business Great Depression,” Colas says. “The reason Chipotle’s stock is working is because scores of small Mexican restaurants have closed in urban areas.”

Many of his Midtown Manhattan neighbors have fled, he says, working remotely from second or rented homes, and their spending may be largely unabated as they shop online. But the small businesses that depend on their physical presence in the city have seen business dry up, and business owners are cutting jobs and curtailing spending.

This divergence is showing up in portfolios. “If you want to play momentum or growth, you are inevitably playing wealth inequality,” says Laura Geritz, head of money manager Rondure Global Advisors. Companies like LululemonAthletica (LULU), Peloton Interactive(PTON), Estée Lauder(EL), luxury retailers that cater to the wealthy, and the FANG stocks— Facebook(FB), Amazon, Netflix(NFLX), and Alphabet’sGoogle (GOOGL)—have been the biggest winners throughout the bull market.

If there’s a populist backlash or a push to increase regulation, these companies, Geritz says, are among the most likely to take a hit: “To me, it is a portfolio-risk problem.”

As awareness about racism and inequality grows, the way that companies respond could affect their brands and, consequently, their valuations. As company chiefs talk more about these issues, scrutiny over their practices will intensify beyond just ESG-minded investors—and that, too, will seep into valuations, says Christopher Smart, chief global strategist for the Barings Investment Institute. “Inequality is the defining feature of our economy today,” he says. “That has implications for the kinds of companies and investments that will and won’t do well.”

Some of the stocks that have performed through the Covid-19 lockdowns—such as education technology, telemedicine, affordable-housing investments, financial technology, and digital payments that can help the unbanked—can also work even as people try to address inequality, says Afsaneh Mashayekhi Beschloss, founder of investment manager Rock Creek Group.

To be sure, inequality isn’t an easy factor for investors to model. While the Fed has hundreds of variables that economists and strategists can use to model the U.S. economy—from oil rising a certain amount to the dollar weakening—there’s no lever for widening inequality.

“When there is an unquantifiable risk from a finance perspective, you worry about nonlinear effects—or something suddenly coming out of the blue that can change things that become very important for economic and earnings forecasts,” says Sløk.

Add that uncertainty to current valuations and it contributes to anemic projected long-term returns. If today’s high valuations persist, says GMO’s Montier, stocks could bump along at 3.5% indefinitely. And that’s the optimistic case. “The backdrop of inequality and the fragility it creates,” Montier says, “depresses long-term return projections even further.”

And that is something investors care very much about.


A gringo takeover bid for the Inter-American Development Bank

The United States breaks a gentlemen’s agreement

Since it was founded in 1959, the Inter-American Development Bank (IDB) has had just four presidents: a Chilean, a Mexican, a Uruguayan and, since 2005, Luis Alberto Moreno, a Colombian. Under the gentlemen’s agreement by which it was founded, Latin America has the presidency and a small majority of the capital while the United States has the number-two job and some informal vetoes over how the bank is run.

The IDB has not been free of the faults of such institutions, such as bureaucracy and a degree of cronyism, but it has played an important role in the region. It lends around $12bn a year for infrastructure, health, education and so on, does some useful research and advises governments. It has also been a channel of communication between the two halves of the Americas.

Donald Trump doesn’t believe in gentlemen’s agreements, and his administration this week broke this one. The Treasury Department named Mauricio Claver-Carone, the top official for Latin America at the National Security Council (NSC), as its candidate to replace Mr Moreno, who is due to step down in September. Mr Claver-Carone, a Cuban-American, is technically qualified for the post.

He has been an adviser to the Treasury and a representative to the imf, and was involved in the Trump administration’s initiatives on development finance. He has told interlocutors that he would serve only one term at the idb, would bring fresh ideas and would be better placed than a Latin American to get the Treasury’s crucial support for a capital increase that would give the bank resources to mitigate the covid-19 slump in the region. These are things that many in Latin America might welcome.

But Mr Claver-Carone is a controversial choice, and not just because his nomination breaks with tradition. At the nsc he has been the chief architect of Mr Trump’s Venezuela policy, which has failed in its aim of getting rid of the dictatorship of Nicolás Maduro.

“He’s a guy who comes with very Miami-type baggage, adversarial to Cuba and Venezuela and representing a conservative alliance,” says a Latin American diplomat. “He would bring ideology directly into the bank.”

Mr Claver-Carone walked out of the inauguration of Argentina’s president, Alberto Fernández, in December because of the presence of a Venezuelan minister. Many who have dealt with him describe him as arrogant and confrontational.

Given the Trump administration’s cold war against China, Mr Claver-Carone’s appointment as head of the idb might force Latin America to choose between the two countries, which the region is reluctant to do. Although China is granting fewer loans to Latin America than it did recently, it remains one of the region’s most important trade partners.

The Trump administration was furious with Mr Moreno for agreeing to hold the bank’s annual meeting in China in 2019 (though in the event it was delayed and moved to Ecuador because of a row over who represented Venezuela). Mr Claver-Carone has his own animus against Mr Moreno, who vetoed his appointment as the bank’s vice-president.

For Latin America the loss of the idb presidency would be a big diplomatic defeat, reflecting the region’s weakness and ideological division. Its leaders are a generally unimpressive bunch.

They have failed to unite behind a candidate of their own. Diplomats expected the job to go either to Brazil or to Argentina. Jair Bolsonaro’s government in Brazil informally canvassed support for Rodrigo Xavier, an experienced banker.

Argentina’s putative candidate, Gustavo Béliz, is a competent former idb official, but its centre-left government has few allies in the region. Brazil looks likely to back Mr Claver-Carone, mainly because Mr Bolsonaro has aligned himself closely with Mr Trump. Other smaller countries may, too, because they are desperate for money.

The new president must secure a double majority, of countries representing 50% of the IDB’s shares (the United States has 30% and Brazil 11%) and separately of the 28 members in the Americas. That may yet be a problem for Mr Claver-Carone.

The biggest reason to oppose his nomination is that he represents a polarising administration that may well lose an election in November, making him “the earliest lame duck in history”, as a South American official puts it.

The sensible course would be to extend Mr Moreno’s term until next year, both to give time for other candidates to emerge and to see whether Mr Claver-Carone really represents the United States.


by Egon von Greyerz

Here is a joint statement from Lagarde and Powell at a secret G7 meeting with all Leaders and Finance Chiefs of the seven nations attending as well as the IMF and BIS:

“The financial system has been on the verge of collapse since September 2019 when we started Repos and QE. And since then it has only got worse. The coronavirus hit us at a time when the banking system was almost down and out.

We had enough problems saving the banks. But now we must save big corporations, small companies, individuals, local municipalities and states, the Federal State and this on top of rescuing a financial system which is deteriorating by the day. The whole system is leaking like a sieve and we are struggling to keep it all afloat.

Fortunately we have printing presses and that helps to keep it all going but only just. Our big fear is that the market will realise that all the money we are printing is worthless. And it is of course but we can’t tell anyone. But if the world wakes up to this one day soon, the financial system could implode in a matter of days. And we would be totally helpless to stop it………”


And this dear readers is where the world stands today. On the verge of an implosion of the whole financial system. Just a small crack could push the whole system into a black hole.

All that is needed is a severe second wave of CV-19 or a bank collapse, triggering an implosion of debt markets and the whole system.

Yes, we know the world was in a similar situation in 2008 but with over $100 trillion more in debt and who knows how many additional $100s of trillions of derivatives plus a world economy disintegrating – it is now exponentially worse from a risk point of view.

We must also remember that bad debts in the financial system are going up by the minute with most borrowers under severe financial pressure. Just look at the chart below how bad debts follow unemployment. The banks haven’t reported this yet but we will see it in the next couple of quarters.


So why don’t the Fed and ECB chiefs tell the truth? Well, maybe they are, in their own CB Speak.

ECB President Christine Lagarde said the recovery from the coronavirus pandemic will be “restrained” and will change parts of the economy permanently. And Powell recently said: ”The path ahead is likely to be challenging. Lives and livelihoods have been lost, and uncertainty looms large.”

So “restrained” and “challenging” is as far as they can stretch without panicking the world.

They would obviously never warn bank depositors that their money will soon be gone. This is why people must figure it out themselves. But they won’t of course until it is too late.


Most people have never had to worry about risk in the financial system since until now they have been saved by the CBs.

With more than 50 years in business you learn a lot of lessons on the way. As a young man, when acquiring my MBA back in 1969 I had to learn everything about Keynesian economics, only understanding much later how wrong it all was.

My first job was in commercial lending in a Swiss Bank. Those were the days when the Swiss banking system was run on conservative principles. That was the perfect training for analysing and understanding risk and very different from the massive leverage of today with minimal capital backing.

My real grounding in dealing with risk was at Dixons. At the time it was a small listed UK business which we built up to the UK’s leading consumer electronics retailer and a FTSE 100 company. I was first a green 29 year old Finance Director and a few years later Executive Vice-Chairman. Dixons was founded by a Jewish entrepreneur who was a superb businessman and retailer. It was a steep learning curve. He is now 88 and still as sharp as ever.

One of our principles was to always panic early but in a controlled manner. For example, if there was a substantial downturn in consumer spending, we implemented major cost reductions across the company within a few days. And if we made major acquisitions, we quickly sold off dead or liquid assets to reduce leverage to conservative levels.

By being financially prudent and commercially aggressive, we managed to grow the company fast without taking excessive risks. We survived without pressure both the oil crisis in the early 1970s and the coal miners’ strike which led to having electricity only 3 days a week. The other days we sold televisions with the help of candle lights.

Low leverage and low debt were the key. So, very different to today with massive debts and leverage. And that is why no individual and no company can survive a serious crisis without massive state aid. In recent times, no one has been taught to save or build up a nest egg for a rainy day. When things go well, all the money is spent and when they go badly, you either borrow money or the state has to help. This goes for individuals as well as for big corporations.


With low or zero interest rates and the value of money constantly declining, there is clearly no incentive to save whatsoever. Also, governments and central banks are setting very poor examples.

But how can you expect people to be prudent when their governments and central banks have for decades been running deficits and printing money. Debts and deficits are the mantra of modern finance. But what no one seems to understand is that this mantra has become a chronic disease which is killing the world a lot faster than the coronavirus.


The world’s central banks are now in the process of outshining both Weimar and Zimbabwe. Together with governments they have globally printed and borrowed $18 trillion since CV started. And since the Great Financial crisis started in 2006 they have more than doubled global debt from $125 trillion to over $275 trillion but that is just the beginning.

We talk about billions, trillions and quadrillions as if we understood what it means but nobody really does. It is absolutely impossible to fathom what a trillion is. Let’s start by counting to one trillion. It will take you 32,000 years. And then you would have to count very fast, never hesitate nor make a mistake – nor start from the beginning again. Ok, so the $18T just created globally, how long would that take? Almost 600,000 years.


So clearly totally unrealistic and impossible. Whenever this magnitude of money has been manufactured before, like Weimar, it has always been totally worthless. And it is this time too!

This magnitude of debt can never be serviced at a market rate. Only at near Zero or negative rates. It can never be repaid with properly earned money. $18T represents 22% of Global GDP. And since almost all countries have deficits today, there is absolutely ZERO chance that this debt will ever be serviced or repaid in future. Remember that the US has not had a proper budget surplus since 1960. (Please don’t write to me about the Clinton years. They were fake surpluses as debt continued to increase).

Virtually all the money created by the US government and the Fed in the last 20 years is totally worthless. Because any money created at will out of thin air is by definition fake. If all that was required to print the $10s of trillions was to press a button and nothing was produced by way of goods or services, then the money has ZERO value.

I know I keep stressing the previous point over and over again. This is done so that at least a few people can understand what is likely to happen next and therefore prepare themselves and their financial situation.

So why don’t Powell and Lagarde tell the people that central bank actions are destroying the economy and the value of the country’s money.

The dollar has lost 86% in this century and the Euro 82%, measured in real money. Real money is of course gold since it represents constant purchasing power and is the only money which has survived in history.




There is an ominous disconnect between equity values and profits. As the chart below shows, values have doubled since 2012 with profits stagnant 2012-19. Now in 2020, profits are crashing and stocks will follow.

The Dow correction up finished on May 8 and is now resuming the downtrend. All the V recovery optimists are going to get a real shock. The monthly Dow peaked in January 2020, see chart, and the downtrend was confirmed well before CV started to trouble markets.

I have been saying in the last couple of weeks that a resumption of the stock market downtrend is imminent and it seems clear that imminent is now. Most market participants will be shocked as stocks around the world crash down below the March lows and long term much, much lower.

Gold & Silver

Many have feared that the precious metals will initially fall with stocks but this seems unlikely to be the case.

On the contrary, it looks like Gold is now breaking above the important $1,770 level. Since the Gold Maginot Line was broken a year ago at $1,350, gold is up over $400 or 30%. The 6 year consolidation since 2013 has built up a lot of energy that will take gold to over $2,000 in the next move.

There has been a massive fight to hold Silver below the $18 level. It seems the LBMA boys are now losing the fight as silver has gone through the $18 level which it has held below since 2014 with 3 months’ exception in 2016.

This Silver Maginot Line is even more significant than the Gold one as it comes from a much lower level of 64% below the $50 peak. Once through, we are likely to see a silver explosion and a sharp fall in the gold/silver ratio.


Praeterea censeo Carthaginem esse delendam

– Cato the Elder
3rd Punic War 149 – 146 BC

“Furthermore I consider that Carthage must be destroyed” is what Cato the Elder said at the end of every speech he gave in the Roman Senate prior to the 3rd Punic war 149-146 BC. In the end his persistence paid off and Carthage a Phoenician City in North Africa was destroyed.

I learnt this phrase in Latin at school and also about Roman history and it has stuck ever since.

The reason why I mention this is that I, like Cato, normally finish most my articles in the same way, namely that you must hold gold for wealth preservation purposes and not for gains measured in phoney paper money which is about to be totally debased.

Hopefully not just my historical understanding of gold but also my passion and persistence will help a few people to avoid ruin in coming years.

P.S. The secret G7 meeting discussed at the beginning of this article obviously never took place. But it should have!

For Russia, the Future Is North

Stabilizing its Arctic regions is becoming a priority for Moscow.

By: Ekaterina Zolotova

The fall of oil prices and the campaign to manage the coronavirus pandemic have taken a toll on Russian finances, perhaps nowhere more so than in the regions of the Arctic. In the Yamalo-Nenets Autonomous District and the Komi Republic alone, regional revenue fell by 60 percent compared with last year.

The Krasnoyarsk Territory and Murmansk Region were also significantly affected. And while this is a sign of hard times to come for the people who live there, these oft-overlooked regions, which are among the biggest oil and natural gas producers for a national economy that relies heavily on oil and natural gas, also affect the financial stability of the country writ large.

The Kremlin understands as much and, if push comes to shove, will make it a priority to maintain the economic health of the Arctic regions. But given its budgetary shortfalls, it will struggle to do so.

When the Soviet Union collapsed, the Russia it left behind was a much more “northern” country. It lost the fertile lands of Ukraine and Central Asia, and there was only so far it could expand south into the newly formed countries beneath it. And so the Arctic, which constitutes about 20 percent of Russian territory, has become a space in which Moscow can gain leverage and military and economic power.

Indeed, the region is considered by many to be essential to Russia’s becoming a great power again. For centuries, the Arctic was a liability, a natural border that hindered Russian expansion.

Now, as climate change melts the ice and as technological development creates more opportunity, it’s an asset, one that can someday be a hub for trade and military activity. More important to Moscow, it’s a resource to mine.

About 41 percent of all the Arctic’s oil and gas resources are located in Russian territory. More than 80 percent of Russia’s gas and about 17 percent of its oil is produced here, accounting for about 10 percent of the country’s gross domestic product and about 25 percent of Russia’s exports, and contributing some 15 percent to the government budget. (The Yamalo-Nenets Autonomous District itself accounts for about 43.5 percent of the total resources of the Arctic.) The region is also a potential source of rare earth elements.

The promise of the Arctic has naturally attracted other countries that are now in direct competition with Russia over its potential benefits, including Denmark, Canada, Norway, Iceland, Sweden and the United States.

Even countries that don’t directly border the Arctic – especially those in the Asia-Pacific – are showing interest, since the proposed North Sea trade route would significantly reduce the delivery time between Asia and Europe.

To get a leg up on the competition, Russia needs a strong military, economic and commercial foundation. To that end, it has been expanding its military bases and its Arctic Fleet and has slowly begun to construct viable ports for the long term.

Year-round, in particular winter, navigation cannot be carried out without a fleet of powerful atomic icebreakers, which need ports and other infrastructure. The government in Moscow knows that if it ever wants to establish such a fleet, it needs to start now.

Which is why the Kremlin wants to strengthen the region’s economy by attracting investments and qualified personnel, and by building infrastructure. Oil extraction, and therefore the expansion of Russian influence, requires a constant influx of skilled labor, modern technologies and infrastructure and, of course, the support of the local population.

The collapse of the Soviet system had a huge impact on the development of the Arctic – production in Yakutia-Sakha and Chukotka decreased, some mining centers and industrial settlements were completely abandoned, poverty and unemployment rose, and the reduction in northern benefits accelerated the outflow of the population from the region. Regions like Yamal-Nenets and even Murmansk lost about 20-25 percent of their population.

Moscow knows from the experience in the immediate aftermath of the Soviet Union’s collapse that without financial and tax incentives, it will be difficult to keep a skilled population, capable of supporting economic projects in regions with a climate as harsh as that in the Arctic.

In Soviet times, the government factored in the “cost of cold,” so sometimes wages in the Arctic were as much as four times higher than in other regions of the Soviet Union. This is why my grandparents moved from central Russia to Murmansk, and indeed, in the 1970s they could afford much more than people from Moscow. But even today, the region, which sports Russia’s highest per capita incomes, continues to attract labor.

It’s a good thing, too, because job vacancies in the region among resource extraction and industrial construction companies are growing. To stimulate labor inflows, the government has introduced the “northern allowance,” a bonus added on to wages. The size of the bonus depends on the region.

For example, in the Chukotka Autonomous District, employees receive a bonus of up to 100 percent of their salaries, whereas in Yamalo-Nenets the bonus is 80 percent.

This is why some northern regions like Yamalo-Nenets have the country’s highest level of family welfare. An average family with two children in Yamalo-Nenets in 2019 had almost 90,000 rubles ($1,300) left each month after covering the minimum expenses, compared to 55,000 rubles in Chukotka Autonomous District and 52,000 rubles in Nenets Autonomous District.

In the region of Moscow, by contrast, the same family would have had about 40,000 rubles left. Average monthly wages in Chukotka and Yamalo-Nenets are also higher than in Moscow and other regions – 109,300 rubles and 102,100 rubles, respectively, compared to 95,000 rubles in Moscow.

The government is trying to attract skilled workers in other sectors besides energy to come to the Arctic areas. For example, Moscow promised a one-time bonus of up to 3 million rubles for medical workers. In addition, the state is trying to attract investment and entrepreneurs by providing tax benefits and other tax advantages.

Support is provided for the construction of ports, such as a zero income tax rate for 10 years or zero value-added tax on services for sea transport of export goods and their icebreaking support.

Because of low oil prices, the OPEC+ production cut and the overall economic slowdown, exploration and mining are on the decline, and there’s less investment flowing into the region. If the situation leads to an erosion of salaries or social benefits, people may begin to gradually leave the region, just as they did in the 1990s.

But there are limits to how much financial aid Moscow can offer to prop up life in the Arctic, including for political reasons; already there is infighting within the Ministry of Finance, and there’s discontent in other regions, such as the Caucasus, due to insufficient funding. Even within the Arctic itself there is a rivalry between regions over funding.

To streamline its support policies and minimize dissatisfaction, the Kremlin has been considering optimizing the Arctic space and is striving to create an Arctic federal district. Yet this idea, too, sparked a backlash.

The region is very divided in terms of population and wealth, and different regions have different opinions on ideal economic strategies and ecological questions.

The indigenous population is dissatisfied with the activities of large Russian energy companies that often cause the destruction of their indigenous environment. Moreover, the ruling United Russia party is not strong in all the Arctic regions.

The Kremlin tried to merge the Arkhangelsk Region with the Nenets Autonomous District last month, during the height of the country’s coronavirus outbreak, but was forced to back down in the face of local protests.

The slump in oil prices and the broader economic downturn will damage Russia’s efforts to develop the Arctic. Without financial incentives and development, critical investment and specialists could even begin to move out of the region.

This could put Russia at a disadvantage in the international race for influence in the Arctic. The Kremlin will make significant efforts to prevent this outcome and keep up the pace of economic development in its Arctic regions.