Precarious World

Doug Nolan

Another fascinating – if not comforting - week. A Friday Wall Street Journal headline: “Big Tech’s Embarrassment of Riches - Amazon, Apple, Facebook and Google all show resilience during pandemic while undergoing congressional scrutiny.” Amazon, Apple, Facebook and Google all reported booming earnings the day following Wednesday appearances by respective CEOs before the House Antitrust Subcommittee hearing.

Down the road from Capitol Hill, the FOMC released their post-meeting policy statement.

Chairman Powell conducted a virtual press conference where he addressed key issues: “inflation running well below our symmetric 2% objective,” and “inequality as an issue has been a growing issue in our country and in our economy for four decades.”

While it is true that inequality has been building for decades, this trend has worsened markedly since the 2008 crisis. Much more so of late.

Powell: “So [inequality is] a serious economic problem for the United States, but it’s got underlying causes that are not related to monetary policy or to our response to the pandemic. Again, four decades of evidence suggests it's about globalization, it’s about the flattening out of educational attainment in the United States compared to our other competitor countries. It’s about technology advancing too.”

If we could chart “inequality,” it would at this point be rising parabolically – following the trajectory of the Fed’s balance sheet. I had been assuming Fed holdings would at some point be getting a lot larger. It seemed clear inequality would only get worse. COVID dramatically accelerated both trends.

Bubble analysis is these days as fruitful as ever. We’re in the waning days of a multi-decade super-cycle. Bubble markets have become extraordinarily distorted and increasingly disorderly. Protracted deep structural maladjustment has fostered pervasive Bubble Economy Dynamics.

Aggressive monetary inflation and central bank market interventions – primary contributors to financial and economic Bubbles – are being deployed to hold Bubble collapse at bay. And we’re now witnessing the initial consequences of desperately throwing massive stimulus at speculative market Bubbles and a Bubble Economy.

Apple closed Friday trading at an all-time high $412, with a market capitalization of a world-leading $1.76 TN. After its 90% rally from March lows, the stock enjoys a y-t-d gain of 40%.

Amazon has gained 72% so far in 2020, with market capitalization surging to $1.59 TN. Google has gained 9% ($995bn market cap), and Facebook 23% ($720bn).

Microsoft sports a year-to-date gain of 28%, with a market value of $1.53 TN.

Apple and Facebook traded to record highs this week, with Amazon, Microsoft and Google just below recent all-time highs.

If you have the great fortune to be employed at one of the tech giants (owning shares and option grants), you likely have never had it so good. Moreover, this windfall has created the wherewithal to trade the markets, likely furthering your good fortune.

Powell: “As I have emphasized before, these are lending powers, not spending powers. The Fed cannot grant money to particular beneficiaries. We can only create programs or facilities with broad-based eligibility to make loans to solvent entities with the expectation that the loans will be repaid.”

While Powell’s comments were directed to the Fed’s emergency lending facilities, it has become a critical issue that the Fed can and does “grant money to particular beneficiaries.” Owners of securities – Treasuries, agency bonds and MBS, stocks, investment-grade and high-yield corporate bonds, municipal bonds, CLOs, etc. – have been huge beneficiaries of Fed money.

Many speculating in derivatives markets (i.e. call buyers and put sellers) have benefited hugely.

Robinhood traders – and day-traders and equities speculators generally – have benefited. The leveraged speculating community has been a particular beneficiary.

It’s Central Banking 101 that central banks must stay well clear of “Credit allocation.”

Choosing winners and losers puts a central bank’s credibility at risk and jeopardizes independence. The Fed let the genie out of the bottle with its move to QE and other emergency measures during the last crisis.

Compliments of COVID, inequality is now rightfully considered one of the critical issues of this era. Fed measures directly – and conspicuously - benefit Wall Street firms and clients, the general markets, corporations, and the wealthy. Why, then, shouldn’t the Federal Reserve today turn its full attention to supporting the less fortunate and disadvantaged – especially during the worst pandemic in a century. It’s a reasonable question, and the Fed faces very serious credibility and independence issues if it can’t muster a good answer.

Ironically, markets these days actually fancy all the focus on inequality.

Powell: “So [inequality is] a critical, critical problem for our society but one that really falls mainly to fiscal policy and other policies. Our part of it is to push as hard as we can on our employment mandate… We saw what happened to people at the lower end of the income spectrum late in the last expansion. It was the best labor market in 50 years they told us. We saw that the biggest wage increases were going to people on the bottom end of the wage spectrum… So a tight labor market is probably the best thing that the Fed can foster to go after that problem which is a serious one.”

“Pushing as hard as we can on our employment mandate” translates to “pressing monetary stimulus to the absolute limits.” Results are essentially preordained: inequities will only worsen.

Markets, meanwhile, celebrate the reality that monetary policy is trapped in a dynamic of securities markets Bubble inflation, with bursting Bubbles poised to inflict irreparable damage to Fed credibility. In the meantime, the Fed is stuck knee-deep in political muck (of its own making).

From the FT (James Politi): “Mr Biden made the US central bank a key focus on his plan for a ‘major mobilisation of effort and resources’ to help ‘advance racial equity across the American economy’, his campaign said… In particular, it said that Mr Biden would work with Congress to amend the Federal Reserve act to force the central bank to ‘aggressively enhance its surveillance and targeting’ of ‘persistent’ racial inequalities.”

Chairman Powell and the FOMC would clearly prefer to defer to fiscal policy to help rectify inequality and festering social stress. QE and aggressive market interventions have essentially granted Washington a blank check book. I’ll assume eventual stimulus legislation bipartisan compromise will push this year’s fiscal deficit to $5 TN.

Dump aggressive monetary stimulus on a speculative marketplace and the outcome will be a more unwieldy Bubble. Dump extreme stimulus on a maladjusted Bubble Economy – in the throes of a pandemic - and expect strange results.

How many tens of billions flowed to Robinhood and other trading accounts? Just imagine the enthusiasm generated when free chips are handed to patrons as they enter a casino. How much stimulus flowed freely into stock and bond funds?

How many fiscal stimulus dollars flooded into the already overflowing coffers of the big tech companies, as millions of restaurants and small businesses were breathing their dying breaths.

How much free money was used to purchase iPhones, computers, tablets, TVs and such, helping secure the manufacturing jobs of workers throughout Asia? How much stimulus went into software, cloud and online services, myriad downloads and such, completely bypassing millions of struggling small businesses and most U.S. workers.

This is not your granddad’s economic structure. And to hear the Federal Reserve still focused on below target inflation is a farce. For decades now, the shift to new technologies and a services-based economy placed downward pressure on many consumer prices. And seemingly tepid consumer price pressures empowered a transformation to permanent policy accommodation (the Fed and global central banks).

Loose monetary policies stoked asset price inflation and Bubbles, while accommodating economic structural transformation. When bursting market Bubbles exposed economic vulnerabilities, the Fed resorted to ever more aggressive stimulus measures.

It’s now all coming home to roost. Fed stimulus only stokes dangerous speculative excess, while the Bubble Economy structure is exposed as a financial black hole.

Despite massive monetary and fiscal stimulus, U.S. GDP contracted at a shocking 33% annualized pace during the second quarter. Ominously, Trillions of fiscal stimulus were absorbed like a dry sponge.

This is key: There was a chance for a rapid return to some semblance of normalcy. If the virus had been quickly contained, brisk economic recovery would have restored confidence. Previous spending patterns would have returned, and the vast majority of businesses would likely have survived. But the virus became more contagious and, as a society, we didn’t make the necessary sacrifices to gain the upper hand on COVID.

The outbreak resurgence came with major consequences. The recovery – in confidence and economic activity – was disrupted. The return to previous spending patterns was significantly postponed - if not crushed. Importantly, this ensures that hundreds of thousands (millions?) of sole proprietorships to major corporations will fight for survival. Severe Credit issues are now unavoidable.

“Hogwash,” would be the reply from today’s fearless stock market bulls. Clearly, equities markets are playing a different game – with the assumption aggressive monetary stimulus can sustain Bubble excess for the foreseeable future.

Yet other markets corroborate my analysis.

Ten-year Treasury yields ended the week at a record low 53 bps – down 13 bps for the month.

Perhaps more reflective of the deteriorating environment, the U.S. dollar index suffered its worst month since 2010 – losing 4.8% versus the euro, 6.2% against the Swedish krona, 5.7% against the Norwegian krone, 5.5% to the British pound and 2.0% to the Japanese yen.

Over the past month, Gold gained $195, or 11%, to a record $1,976. Silver surged 34% in July.

And how about some of this week’s equities declines: Germany’s DAX down 4.1% and Japan’s Nikkei sinking 4.6%.

The U.S. has been inflating historic financial and economic Bubbles – and these Bubbles are faltering. Financial Bubbles and Deep Structural Economic Maladjustment will force policymakers into The Precarious World of Ongoing Massive Monetary and Fiscal Stimulus.

Significant dollar devaluation is inevitable, with the dollar’s world reserve currency status in jeopardy. An equities market speculative melt-up only exacerbates instability and systemic fragility.

Risk of major social, political and geopolitical instability is escalating.

The safe havens signal a major crisis is unavoidable.

Twilight of an era

The end of the Arab world’s oil age is nigh

Pain will be felt across the region

Their budgets don’t add up anymore. Algeria needs the price of Brent crude, an international benchmark for oil, to rise to $157 dollars a barrel. Oman needs it to hit $87. No Arab oil producer, save tiny Qatar, can balance its books at the current price, around $40 (see chart).

So some are taking drastic steps. In May the Algerian government said it would slice spending in half. The new prime minister of Iraq, one of the world’s largest oil producers, wants to take an axe to government salaries. Oman is struggling to borrow after credit-rating agencies listed its debt as junk. Kuwait’s deficit could hit 40% of gdp, the highest level in the world.

Covid-19 sent the price of oil plummeting to all-time lows as people stopped moving around in order to limit the spread of the virus. With commerce resuming, the price has ticked back up, though a peak in demand may be years away.

But don’t be fooled. The world’s economies are moving away from fossil fuels. Oversupply and the increasing competitiveness of cleaner energy sources mean that oil may stay cheap for the foreseeable future. The recent turmoil in oil markets is not an aberration; it is a glimpse of the future. 

The world has entered an era of low prices—and no region will be more affected than the Middle East and north Africa.

Arab leaders knew that sky-high oil prices would not last for ever. Four years ago Muhammad bin Salman, the de facto ruler of Saudi Arabia, produced a plan called “Vision 2030” that aimed to wean his economy off oil. Many of his neighbours have their own versions. But “2030 has become 2020,” says a consultant to Prince Muhammad. 

Oil revenues in the Middle East and north Africa, which produces more of the black stuff than any other region, fell from over $1trn in 2012 to $575bn in 2019, says the IMF. This year Arab countries are expected to earn about $300bn selling oil, not nearly enough to cover their spending. Since March they have cut, taxed and borrowed. Many are burning through cash reserves meant to fund reform.

Pain will be felt in non-oil producers, too. They have long relied on their oily neighbours to put their citizens to work. Remittances are worth over 10% of GDP in some countries. Trade, tourism and investment have spread the riches around to some degree. Still, compared with other regions, the Middle East has one of the highest proportions of unemployed young people in the world. 

Oil has bankrolled unproductive economies, propped up unsavoury regimes and invited unwelcome foreign interference. So the end of this era need not be disastrous if it prompts reforms that create more dynamic economies and representative governments.

There is sure to be resistance along the way. Start with the region’s wealthiest oil producers, which can cope with low prices in the short run. Qatar and the United Arab Emirates (UAE) have huge sovereign-wealth funds. Saudi Arabia, the region’s largest economy, has foreign reserves worth $444bn, enough to cover two years of spending at the current rate.

But they have all been hit hard by the pandemic, as well as low oil prices. And they have long overspent. In February, before the coronavirus broke out in the Gulf, the imf predicted that the countries of the Gulf Co-operation Council (GCC)—Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the uae—would exhaust their $2trn of reserves by 2034. 

Since then Saudi Arabia has spent at least $45bn of its cash. 

If it continues at that pace for another six months it would strain the Saudi rial’s peg to the dollar. Devaluation would hit real incomes hard in a country which imports almost everything. 

Officials are worried. “We are facing a crisis the world has never seen the likes of in modern history,” says Muhammad al-Jadaan, the finance minister.

In an attempt to balance the books, Saudi Arabia has suspended a cost-of-living allowance for state workers, raised petrol prices and tripled its sales tax. Even so, the budget deficit could exceed $110bn this year (16% of GDP). More taxes—perhaps on businesses, income and land—could follow. But raising taxes risks further depressing commerce, which has been hobbled in order to contain the coronavirus.

The kingdom had hoped an increase in religious and leisure tourism would at least partially compensate for the decline in oil revenue. That now seems a fantasy. The holy city of Mecca has been closed to foreigners since February. 

Last year the annual haj drew 2.6m pilgrims; this year it has been capped at around 1,000. 

“The kingdom is stuck in the oil dependency it needs to climb out of to survive,” says Farouk Soussa of Goldman Sachs, a bank.

Still, some see an upside to the upheaval in oil-producing states. The countries of the Gulf produce the world’s cheapest oil, so they stand to gain market share if prices remain low. As expats flee, locals could take their jobs. And the region’s struggles may convince some countries to speed up reforms. 

Credit-rating agencies praise Saudi Arabia’s tax rises as a step towards turning a rentier economy into a productive one. To drum up fresh revenue, Arab leaders speak of a wave of privatisations. The kingdom recently announced the sale of the world’s largest desalination plant at Ras al-Khair. But at the moment investors seem more inclined to pull their money out of the region altogether.

Meanwhile, public anger is growing. Saudis mutter about the new taxes, which fall most heavily on the poor. “Why is mbs not taxing the rich?” gripe the jobless on social media, referring to Prince Muhammad by his initials. “Why doesn’t he sell his yacht and live like us?” asks a mother of four from the north, where the prince is building more palaces. 

In Iraq officials enraged by pay cuts have thrown their support behind a protest movement that is seeking to topple the entire political system. In Algeria, where income per person has fallen from $5,600 in 2012 to under $4,000 today, protesters are drifting back to the streets. The region’s rulers can no longer afford to buy the public’s loyalty.

Where the oil doesn’t flow

Protests have already resumed in Lebanon, where the pandemic temporarily halted months of demonstrations over corruption and a collapsing economy. Lebanon is not an oil producer (though it hopes to become one). Its crisis, which could see gdp shrink more than 13% this year, comes from the unravelling of a post-civil-war economic order too reliant on services and a bloated financial sector. 

But the slump in the Gulf has made it worse. A long-term drop in oil prices will bring more pain even for Arab countries that do not pump the stuff.

Remittances from energy-rich states are a lifeline for the entire region. More than 2.5m Egyptians, equal to almost 3% of that country’s population, work in Arab countries that export a lot of oil. Numbers are larger still for other countries: 5% from Lebanon and Jordan, 9% from the Palestinian territories. 

The money they send back makes up a sizeable chunk of the economies of their homelands. As oil revenue falls, so too will remittances. There will be fewer jobs for foreigners and smaller pay packets for those who do find work.

This will upend the social contract in states that have relied on emigration to soak up jobless citizens. About 35,000 Lebanese graduate from university each year; the Lebanese economy only employs 5,000 of them. Most look abroad for work. The exodus has speeded up the brain drain. Egypt used to supply unskilled labour to the Gulf. 

In the 1980s more than one-fifth of its migrants toiling in Saudi Arabia were illiterate. Today most have a secondary education; the share of university graduates has doubled. Egypt is now struggling with covid-19 in part because it lacks enough doctors: more than 10,000 have emigrated since 2016, many to the Gulf.

With fewer opportunities in the oil-producing states, many graduates may no longer emigrate. 

But their home countries cannot provide a good life. Doctors in Egypt earn as little as 3,000 pounds ($185) a month, a fraction of what they make in Saudi Arabia or Kuwait. A glut of unemployed graduates is a recipe for social unrest. Add to that, perhaps, an influx of compatriots forced to come home when their contracts run out. 

Many do not wish to, since emirates like Dubai and Qatar offer not just well-paying jobs but first-class services and relatively honest governance. A Gallup poll published in January found that just 10% of Egyptian migrants in the rich parts of the Gulf want to return.

Businesses will be hurt as well. Oil producers are big markets for other Arab countries. In 2018 they took 21% of exports from Egypt, 32% from Jordan and 38% from Lebanon. Firms can pursue other trading partners, of course. Egypt already exports more to both Italy and Turkey than it does to any Arab country. But the stuff it sells there—petroleum products, metals and chemicals—tends to create few jobs for Egyptians. 

Countries in the region buy more labour-intensive goods, such as crops, textiles and consumer products. More than half of the televisions exported from Egypt wind up in the GCC. Jordan’s pharmaceutical industry, which generates more than 10% of its total exports and supports tens of thousands of jobs, sends almost three-quarters of its exports to Arab oil producers. Smaller, poorer Gulf states will make for more impecunious customers.

They will also send out fewer wealthy tourists. In Lebanon visitors from just three countries—Kuwait, Saudi Arabia and the uae—account for about one-third of total tourist spending. Most visitors to Egypt are from Europe, but Gulf tourists stay longer and spend more money at restaurants, cafés and malls. These countries can look elsewhere for revenue, but it will be hard to replace the wealthy tourists in their backyards. 

Saudis spend the summer in Cairo or Beirut because those cities are close, culturally familiar and speak the same language. Slovenians or Singaporeans are unlikely to do the same.

It is something of a historical accident that the Gulf states rose to become hubs of power and influence in the Middle East. For centuries they were backwaters sustained by pilgrimage and the pearl trade. 

The rulers of the region were in the great old Arab capitals: Cairo and Damascus fought wars against Israel and led the cry for Arab nationalism. Beirut was the financial and cultural hub.

These old powers, now well into decline, have an uneasy relationship with the newcomers. In a recording leaked in 2015 Abdel-Fattah al-Sisi, the Egyptian president, mocked the Gulf’s wealth. He told an adviser to ask the Saudis for $10bn in financial aid, a request that was met with laughter. “So what? They have money like rice,” Mr Sisi quipped in response.

They have been generous with it, if selectively so. Kuwait, Saudi Arabia and the UAE gave Egypt about $30bn in aid after 2013, when Mr Sisi overthrew an elected Islamist government. 

The Sunni leadership in Lebanon has long been a client of the Gulf states. 

Rafik Hariri, who led the country after its civil war, made his fortune as a contractor in Saudi Arabia. His son Saad, who also served as prime minister, holds Saudi citizenship. The GCC has bailed out Jordan twice in the past decade.

In recent years, though, funding has started to dry up. Partly this is due to political disputes. Seen from Riyadh or Abu Dhabi, many Arab states they once subsidised now look like bad investments. The Saudis are frustrated that Mr Sisi did not send troops to support their ill-fated invasion of Yemen, and that the younger Mr Hariri was too tolerant of Hizbullah, the Shia militia and political party backed by Iran. 

Their diminishing largesse also reflects their diminishing fortunes. Egypt has not received any money in years. No one from the Gulf looks willing to bail out Lebanon. Jordan had to plead to receive a five-year, $2.5bn aid package from the Gulf in 2018, half of what it got in 2011. None of this is necessarily bad: many Arabs would appreciate less foreign influence in their countries. 

But it will add to the financial pressure on their own indebted governments.

It may also presage a broader change in the region’s politics. For four decades America has followed the “Carter Doctrine”, which held that it would use military force to maintain the free flow of oil through the Persian Gulf. Under President Donald Trump, though, the doctrine has started to fray. 

When Iranian-made cruise missiles and drones slammed into Saudi oil facilities in September, America barely blinked. The Patriot missile-defence batteries it deployed to the kingdom weeks later have already been withdrawn. Outside the Gulf Mr Trump has been even less engaged, all but ignoring the chaos in Libya, where Russia, Turkey and the uae (to name but a few) are vying for control.

President Xi has a bridge to sell you

A Middle East less central to the world’s energy supplies will be a Middle East less important to America. Russia may fill the void in places, but its regional interests are narrow, such as its determination to preserve its Mediterranean port at Tartus in Syria. 

It does not wish to—and probably cannot—extend a security umbrella across the Arabian peninsula. China has tried to stay out of the region’s politics, pursuing only economic benefits: construction contracts in Algeria, port concessions in Egypt, a wide range of deals in the Gulf.

As Arab states become poorer, though, the nature of their relationship with China may change. 

This is already happening in Iran, where American sanctions have choked off oil revenue. 

Officials are discussing a long-term investment deal that could see Chinese firms develop everything from ports to telecoms. It is framed as a “strategic partnership”, but critics worry it could leave China in control of the infrastructure it builds, as it has in some indebted Asian and African countries. Falling oil revenue could force this model on Arab states—and perhaps complicate what remains of their relations with America.

No way out

Ask young Arabs where they would like to live, and there is a good chance they will choose Dubai. A survey in 2019 found that 44% viewed the uae as the ideal country to emigrate to. They often frame their admiration in contrast to their home countries. For all its faults, Dubai (and its neighbours) offers something unusual in the region: the police are honest, the roads well paved, the electricity uninterrupted.

As Lebanon’s economy crashes, everyone is talking of emigration. Yet there are few jobs in the Gulf. “Dubai was always the escape,” says one woman. “Now it’s like we’re trapped, with no backup plan.” Young people across the region have the same fears. Egypt can feel like a country crumbling under its own weight; Jordan is perennially in crisis. Almost ten years after a Tunisian fruit-seller lit the spark of the Arab spring, the frustrations that caused it persist. 

The end of the oil age could bring change. But it will bring pain first. 

New Models for a New World

As the world struggles to overcome from the COVID-19 crisis, recasting multilateralism and reforming capitalism have become crucial tasks. Both need to become force multipliers in a new system of dynamic value creation. But the fundamental purpose and underlying principles of each will first need to be redefined.

Bertrand Badré, Ronald Cohen, Bruno Roche

badre13_Kena BetancurGetty Images for Global Goals_unitednationsbuildingflags

PARIS – With multilateralism in peril, so, too, is financial capitalism. Populist political movements and the pandemic-induced global economic catastrophe have shown that both, rather than being pillars of stability, are levers of political and economic power.

As the world struggles to overcome from the COVID-19 crisis, recasting multilateralism and reforming capitalism have become crucial tasks. Both need to become force multipliers in a new system of dynamic value creation. But the fundamental purpose and underlying principles of each will first need to be redefined.

Today’s multilateralism, conceived by the victors of World War II, was geared toward preventing global conflicts (through the United Nations), organizing collective defense (through NATO, and the now-defunct Warsaw Pact, for example), and supporting economic reconstruction and development (through the Marshall Plan, the International Monetary Fund, and the World Bank). Globally, it established common economic rules of the game.

But this bounded, regulated form of capitalism soon came under attack, not least by Chicago school economists espousing a free-market agenda favorable to financial capitalism. Businesses and educators alike embraced the new orthodoxy, which by the 1970s had come to dominate the commanding heights of the global economy. One of its central pillars – corporate governance based solely on “maximization of shareholder value” – became an unquestioned assumption.

As it turned out, post-war multilateralism and financial capitalism reinforced each other, because both were based on relationships that typically result in “winner-take-all” outcomes, or that otherwise exhibit a systemic bias in favor of those with more power. To be sure, this power-driven multilateralism ushered in a long period of relative global stability, and the Chicago school’s policy prescriptions helped to create the conditions for the expansion of financial empires and the emergence of new middle classes, lifting tens of millions of people out of poverty. Some individuals and families enjoyed unfathomable levels of new wealth.

But that doesn’t mean the arrangement was optimally efficient for society as a whole. Throughout history, various systems of exploitation have built empires and amassed great wealth while performing atrociously in terms of human wellbeing and social capital (trust, community cohesion, a capacity for collective action). Their collapse represented moral progress, because it allowed for a new era in which human rights and shared prosperity could prevail.

For multilateralism and capitalism to regain their legitimacy and widespread appeal, they must be refashioned as systems of mutuality and reciprocity. A good way to start would be to revive the vision of Robert Schuman, widely considered the father of European unification, who proposed just after WWII that Europe abandon power politics in the name of solidarity and mutuality. That vision has underpinned a period of European peace and prosperity not seen since the Roman Empire, demonstrating, despite its many shortcomings, that reciprocity can be more effective than realpolitik in advancing collective goals.

In meeting the COVID-19 crisis, many companies are preparing to contribute to a Schumanesque reform agenda by adopting new models of corporate governance and innovation, with an eye toward purpose-led value creation. The business community is recognizing that addressing stakeholder problems is a better approach than maximizing shareholder returns without considering the consequences.

Stakeholder capitalism is no longer just an aspiration. Business leaders and investors are launching and joining encouraging real-world initiatives that will elevate the place of long-neglected participants in the corporate calculus. Most important, promising new schools of economic thought are being tested and applied to transform value-creation models across business and finance.

For example, the “Economics of Mutuality,” a course co-created by scholars at the University of Oxford and Catalyst, Mars Inc.’s in-house think tank, is now being taught at leading universities, including Oxford, Sciences Po, and the China Europe International Business School. And there is growing enthusiasm for Harvard Business School’s Impact-Weighted Accounts Project, the Impact Management Project, and other initiatives.

Among business leaders, investors, and educators, support for these new approaches has been growing, because they can empower businesses to solve key social and environmental challenges in the ecosystems in which they operate without sacrificing performance. More industry leaders are acknowledging that the purpose of business is not to earn profits at the expense of people and the planet, but rather to develop profitable solutions to shared problems.

Just as companies and financial institutions need to reform their models to remain relevant and sustain performance, so must multilateral systems and institutions be redefined in order to promote peace and shared prosperity. Policymakers around the world have an opportunity – as well as an urgent duty – to attach purpose-driven conditions to emergency policies during the crisis, and to bring a multi-stakeholder mindset to the task of restarting the economy.

Such a broad-based shift in perspective can bring about systemic change. At the same time, it can reinforce the foundation underlying business: venturing out onto the shifting sands of unfulfilled promises.

Bertrand Badré, a former managing director of the World Bank, is CEO of Blue like an Orange Sustainable Capital and the author of Can Finance Save the World?

Ronald Cohen, Chairman of The Portland Trust, is a former chairman of Bridges Ventures.

Bruno Roche is the Founder and Executive Director of Economics of Mutuality and a former chief economist at Mars, Inc.

Investors in gold and investors in bonds cannot both be right

Record high for the metal suggests that debt markets have got it wrong on inflation

Tommy Stubbington

Analysts at Goldman Sachs have increased their 12-month price target for gold by $300, to $2,300 a troy ounce © REUTERS

Gold is shiny but ultimately useless. At least that is what sceptics of the metal’s virtues as an investment are fond of pointing out, highlighting the lack of any income from holding it.

But in the topsy-turvy world of financial markets in 2020, an income of zero can sometimes look attractive. Not only does nearly $15tn of debt around the world trade at a sub-zero yield, but the US Treasury market — one of the last bastions of positive income among highly rated government bonds — is now dogged by negative real yields, once inflation is taken into account.

The vanishing returns on offer from debt markets are one reason why the price of gold broke through its 2011 record high this week. So too is the dwindling appeal of bonds as a haven, which undermines the traditional “60/40” idea of investment.

According to that theory, the 40 per cent of a portfolio invested in bonds will rally when equities drop, cushioning losses in the remainder allocated to stocks. But with yields at record lows around the world and central banks damping down volatility with policies that veer close to formal yield targets, that logic seems shakier. Bonds appear to have little room left to rise in the event of a stock market sell-off.

It is little surprise, then, that investors are casting around for new ways to offset their exposure to stocks. For many, gold stands out.

“We’ve had a lot of questions from clients who are interested in gold as a hedge for equities,” said Dario Perkins, managing director for global macro research at TS Lombard. Mr Perkins said these inquiries began during last year’s surge in negative-yielding debt around the world, but have intensified in the wake of the coronavirus crisis as the scale of the Federal Reserve’s bond-buying forces real yields to new lows.

Many investors are aware that the negative correlation between bonds and equities is not an iron law of finance, but a relatively recent phenomenon. Prior to 2000, fixed-income markets tended to rise and fall in tandem with stocks.

Still, for those making the switch to gold as their preferred hedge there is bad news: bullion’s record as a negatively correlated asset is even patchier than bonds’. Mr Perkins, who has run the numbers going back a century and a half, said gold has occasionally offered a useful alternative, but more often has been positively correlated with stocks at times when bonds have too.

Only during bouts of severe inflation — most recently during the 1970s — has gold provided a counterweight to equities, while fixed income did not. More normal is the kind of relationship seen in March this year, when a brief but sharp sell-off in gold came at the height of the carnage in stock markets.

A return of inflation after decades of sluggish price rises, however, is exactly what many gold buyers are positioning for. Governments around the world are issuing record amounts of debt while central banks have been buying bonds at breakneck speed, partly in an attempt to curb borrowing costs. If the global economy were to shake off the effects of Covid-19 quickly, prompting growth and inflation to return, central bankers are unlikely to be in a hurry to withdraw that stimulus.

Analysts at Goldman Sachs cited a potential shift by the Fed “towards an inflationary bias” last week when they increased their 12-month price target for gold by $300, to $2,300 a troy ounce.

Bank of America pointed to another link between bond markets, gold, and the threat of inflation. Michael Hartnett, chief investment strategist, wrote recently that central banks’ bond-buying is thwarting investors who might otherwise bet on higher inflation by selling or shorting government debt. Instead, such would-be bond vigilantes are being “crowded in” to the gold trade.

It is worth remembering that investors have come unstuck betting on inflation in the past. After the last financial crisis, many assumed the unprecedented levels of monetary stimulus would unleash a wave of price rises. Instead, a decade of very low inflation followed.

Many bond investors appear to have learnt that lesson. Although the recent declines in real yields are a result of rising inflation expectations being priced into bond markets, the levels remain low by historical standards. The US 10-year break-even rate — a gauge of expectations of price movements that measures the gap between yields on regular and inflation-protected bonds — is currently at 1.5 per cent. Markets expect an even lower rate in Europe.

Partly this reflects the distorting effects of quantitative easing — by pushing down nominal yields central bank purchases tend to squeeze break-evens. But many investors also harbour doubts over the case for higher inflation, not least because the demand shock of coronavirus has many major economies staring at the possibility of outright falls in prices.

For gold to prove its worth — either as a portfolio stabiliser or a longer-term inflation hedge — bond markets will have to be proved very wrong.

Gold Goes Mainstream, New York Times Edition


There’s a stage in precious metals bull markets where even the least-interested mainstream media outlets feel compelled to acknowledge that something big is happening.

This helps prolong the uptrend by bringing gold and silver to the attention of people who are either unaware of the metals as investments or aware but in need of convincing.

The New York Times just published a great example of this type of article, which begins like this:

New Gold Rush Pushes Price to Record Highs

Something shiny and bright is beckoning investors accustomed to the gloomy days of 2020: gold.

In recent days, gold prices have hit record highs. For the year, gold is up 27 percent, a performance that puts it ahead of most stock, bond and commodity markets.

On Monday, the price of gold futures on the New York Mercantile Exchange rose 1.8 percent to more than $1,931 an ounce. Investors last week had already pushed gold prices past the record last set in August 2011.

Gold New York Times

Gold might seem out of date in a modern investing portfolio, but several developments — all tied to the coronavirus — have banded together to juice demand.

Note the grudging tone: “Gold might seem out of date in a modern investment portfolio…” and “several developments – all tied to the coronavirus…”

There probably isn’t a single gold-bug working at the Times, so it’s no surprise that their reporting contains such qualifiers and disclaimers.

But the rest of the article is fairly accurate and complete. Which is also not a surprise. 

The Times, for all its perspective problems, continues to attract talented reporters. And this one, Matt Phillips, got the general story very right. 

Here’s more:

The pandemic has pushed the global economy into one of the sharpest downturns on record. 

The International Monetary Fund predicts that this year, the world economy will shrink by nearly 5 percent. The plunge prompted central banks everywhere, most importantly the Federal Reserve, to pump hundreds of billions of dollars into financial markets, with the goal of propping up flailing economies.

But those billions aren’t coming from a storehouse; rather, central banks are creating fresh currency. The increase in money supply lowers interest rates and raises the amount of a particular currency, such as the dollar, in circulation. And over time, these moves can both increase inflation (lower interest rates typically spur economic activity) and weaken the value of a currency.

Right now, investors are taking all of that into account and determining that buying gold — which is traditionally considered an investment that holds its value over time — is the best thing they can do to shield themselves from inflation and weakening of so-called fiat, or paper, currencies. As a result, money flows into gold investments have surged in recent months as central banks have stepped up their fight against the downturn.

“It’s all monetary policy,” Mathieu Savary, a macroeconomic strategist with BCA Research, said of the recent rise in gold prices. “It’s very, very easy monetary policy as far as the eye can see and gold loves it.”

Those who traditionally invest in gold say it is a reliable but safe way to store cash. There are, however, other investments, such as government bonds — especially those issued by the United States Treasury — where jittery investors can stash their cash just as easily. And most of the time, they opt for bonds over gold, because bonds pay interest.

But something has happened over the last few months to change that gold-versus-bond calculus.

Since the Fed cut the short-term interest rates it controls to near zero, longer-term interest rates — also known as yields on government bonds — have also fallen to some of their lowest levels ever. The yield on the 10-year Treasury note was roughly 0.6 percent on Monday.

At the same time, because the Fed has created enormous amounts of new money, analysts say it could set the United States up for higher inflation down the road.

Investors are taking note of that possibility. In recent weeks, market measures of expected inflation, known as breakevens, have moved higher, and investors now expect inflation to average around 1.5 percent a year over the next 10 years. 

Since the 10-year Treasury note will return those investors only about 0.6 percent a year, that means investors who buy the 10-year note must essentially be comfortable with losing nearly 1 percent on that investment a year, after accounting for inflation. In the argot of the market, that means “real” or inflation-adjusted yields are negative.

Since not losing money — remember, gold is supposed to hold its value even if it pays no interest — is better than losing money, typically investors switch to gold from Treasuries when this happens.

“The only thing that matters in the gold price is the U.S. real yield,” said Natasha Kaneva, a precious metals analyst with JPMorgan Chase.

Inflows into gold exchange-traded funds — mutual-fund-like vehicles that are one of the easiest ways to buy gold — spiked after the Fed made major policy announcements in late March, during the worst of the outbreak. And the flood of cash to gold funds has continued.

According to the World Gold Council, a trade group, inflows into gold E.T.F.s hit a record in the first half of the year, as some $40 billion arrived. The heaviest inflows came from the United States, where nearly $30 billion in investor money poured into the gold funds.

Several analysts now expect gold prices will rise above $2,000 an ounce in the short term. In a note published last week, analysts at UBS said that negative real rates, a weaker dollar and continued geopolitical uncertainty — such as the tensions between China and the United States — will continue to support the price.

Because the Times tends to lead the mainstream media pack, lesser outlets around the country now have a green light to cover precious metals in a positive way, which will attract smaller but still consequential amounts of generalist money to the sector. 

And so it will go, as precious metals enter the really fun — that is, parabolic — stage of their cycle.

Saved By The Printing Press — For Now


Lawrence Lepard, Managing Partner with Equity Management Associates, just released a report that lays out the coming debt crisis in all its apocalyptic glory.

The excerpt below is just a tiny fraction of the whole report, which should be read in its entirety by anyone who wonders about the fate of todays financial system.


As detailed in our last report, the Government response to the COVID driven bursting of the credit bubble was large and unprecedented. At peak, in the three-month period ended 6/11/2020, the Fed balance sheet expanded by 66% as it grew from $4.2 Trillion to $7.2 Trillion.

Most of that growth has been the purchase of US Treasuries as the Fed has had to monetize deficits in the absence of foreign and domestic UST purchasers in this low treasury yield environment.

Turning our attention to the US Treasury’s National Debt, the next chart shows just how much that leverage has swelled. Note that this chart is one month old and the US Federal debt today (7/9/2020) stands at $26.5 Trillion.

US government debt Saved by the printing press

Treasury issuance

The scale of the projected Federal Debt issuance is truly unprecedented when compared to prior years as seen in this chart:

Treasury issuance Saved by the printing press

If you find yourself wondering how the government can issue this much debt and still maintain “full faith and credit” in the currency then you are not alone.

Who is financing these deficits? The Fed.

As the chart below shows these actions had a more profound effect on growth of the money supply than those taken after the GFC in 2008.

Likely this is due to low interest rates (or concern of growing deficits) no longer enticing domestic and foreign purchasers of US Treasuries as in years past.

Money supply Saved by the printing press

The amount of money being created has almost gone vertical.

The report goes on from here to show how soaring debt and parabolic money creation will lead to various kinds of instability, which in turn will send the price of gold through the roof. 

BlackRock wins $100bn in new client funds during Wall Street rally

Profits beat expectations as world’s biggest fund manager bounces back from rocky start to 2020

Richard Henderson

BlackRock’s assets under management jumped 13% to $7.3tn during the second quarter ©

BlackRock surpassed profit estimates in the second quarter as the world’s biggest fund manager attracted $100bn in new client funds during a bumper Wall Street rally.

The New York group’s assets under management jumped 13 per cent over the period to $7.3tn, reversing a large fall at the start of 2020 and coming within just a whisker of the record high at the end of last year.

The strong inflows boosted the fees BlackRock earns from servicing client portfolios by 2 per cent. Its net profits rose by a fifth compared with the previous year to $1.2bn while revenue rose 3 per cent to $3.6bn.

Chief executive Larry Fink said the roaring run in US stocks, which have returned to the levels at which they started the year, was evidence that stimulus from central banks had calmed investors. “I remain cautiously optimistic about our path to recovery,” he said on Friday.

The group delivered $7.85 in diluted earnings per share on an adjusted basis for the quarter, 13 per cent above analysts’ estimates.

US stocks posted the best rally since 1998 in the second quarter, a strong rebound from a 20 per cent drop in the first three months of 2020. Wall Street’s biggest banks also benefited from the frenetic market activity in the second quarter with JPMorgan Chase, Bank of America, Goldman Sachs and Morgan Stanley all reporting strong rises in bond trading revenues.

Inflows for the quarter were smaller than those in the same period a year earlier but were three times the amount seen in the first quarter, when the pandemic took hold.

Line chart of Rebased showing BlackRock outperforms listed peers

The company’s exchange traded funds business, iShares, brought in $51bn of the inflows, driven by a record $57bn flowing into bond ETFs.

“There used to be a lot of fixed income investors who were worried about ETFs because of concerns about liquidity,” said Kyle Sanders, an analyst with Edward Jones. “Now we’re seeing more and more institutional investors embrace the fixed income platform — that will be a nice growth driver for BlackRock over the next few years.”

BlackRock still trailed Vanguard, the world’s second-largest fund manager, in ETF inflows in the first half of the year, according to data from ETFGI.

BlackRock has taken a prominent role during the pandemic after being chosen to manage the Federal Reserve’s bond-buying programme, although this attracted criticism given that the central bank’s scheme includes purchasing ETFs, even the asset manager’s own funds. BlackRock is not charging the Fed fees related to any ETF purchases.

The group’s financial markets advisory unit, which manages the Fed programme and works with central banks around the world, generated $39m in revenue, down on the same quarter a year ago.

Technology revenue hit a record $278m, almost a fifth above the same period last year. The big rise was driven by BlackRock’s Aladdin platform, which links investors to the markets, ensures portfolios hold the right assets and measures risk across a wide range of assets.

Column chart of Quarterly technology and service revenue ($m) showing Aladdin powers BlackRock's tech revenue to record high

BlackRock’s shares were close to the year’s high point reached in February and just 5 per cent from the record reached two years ago in morning New York trading.

The stock is up 13 per cent this year compared with an 8 per cent decline for fund managers in the S&P 500 index of US blue-chips.

Mr Fink added that the asset manager’s New York-based staff would return to work in “split operations” on Monday.