De-risking/Deleveraging at the Periphery 

Doug Nolan

It was another unsettled week for notably synchronized global markets. 

The week began with a decent bout of hope. 

The S&P500 rallied 2.8% in Monday trading, “its strongest one-day gain since June.” 

Having begun in Asia, the market rally gained momentum in European trading, which set the stage for a gap higher opening for U.S. equities. 

A spark was provided by the Reserve Bank of Australia. 

After its previous Friday attempt fell flat, Australia’s central bank Monday doubled down on its bond purchases, essentially expending $3.1 billion in its yield control operation. 

Australian 10-year yields collapsed a remarkable 35 bps to 1.67%, more than reversing the previous Friday’s price spike. 

After Japanese 10-year yields rose to a five-year high 16 bps Friday, there was a report Monday claiming the Bank of Japan was prepared to act against any excessive rise in yields. 

And then ECB governing council member Francois Villeroy stated the ECB “can and must react” against any unwarranted tightening (aka higher bond yields). 

European yields reversed sharply lower on his comments, with double-digit declines in Italian and Greek yields. Equities caught fire. 

Relief that a concerted central bank effort was poised to counter rising global yields powered Monday’s risk market recovery. 

It would prove fleeting. 

March 4 – Financial Times (Naomi Rovnick, Neil Hume, Joshua Oliver, Aziza Kasumov and Colby Smith): 

“Government bond prices sustained a further blow on Thursday, prompting benchmark stocks to wipe out close to all gains for the year, after comments from Federal Reserve chairman Jay Powell failed to reassure investors… ‘Today was a really interesting day because the market was really firm, a little tentative but firm, and then Powell spoke,’ said George Cipolloni, a portfolio manager at Penn Mutual Asset Management. ‘He really didn’t say anything dramatically different, other than that they’re not at their target yet… which is rattling markets.’”

Ten-year Treasury yields were trading at 1.46% Thursday morning ahead of Chairman Powell’s scheduled Q&A session at the Wall Street Journal’s Jobs Summit – up about five bps for the week. 

Yields surged soon after Powell began speaking, ending the session almost nine bps higher at 1.57%. 

Powell could not have been clearer. 

The Fed Chairman went into significant detail as to what it will take for the Fed to begin tapering QE along with what would be required to commence an increase in short-term rates. 

It’s all dovish – as expected. At least outwardly, the policy focus is geared specifically for a return to full employment. 

The Fed will not be responding to what it views as a transient uptick in inflation.

It was all the normal dovish creed we’ve grown accustomed to – that up until recently was manna to Treasury and risk markets. 

But it’s just not working – and why it’s not is both intriguing and critical for global market Bubbles at a heightened risk of deflating.

Why did bond yields surge on Powell’s boilerplate comments? 

The more obvious – and conventional – view would be his avoidance of any mention of another “operation twist” or, indeed, any measure that might indicate the Fed was considering additional buying at the long-end of the Treasury curve. 

Hopes the Fed would be part of a concerted global central bank “yield control” effort were dashed.

Listening to the entirety of Powell’s comments, there’s much to concern bond investors. 

For one, the Fed is lax on inflation in an extraordinary environment that beckons for vigilance. 

Our central bank is locked into experimental policy doctrine when it should be open-minded and flexible. 

Moreover, the Fed is trapped by a backdrop of Bubble markets and resulting acute fragilities. 

A Friday headline read, “Investors are having a ‘Crisis of Confidence’ in the Fed.” 

While somewhat premature, the Powell Federal Reserve is increasingly suffering from a credibility problem. 

Powell (from the WSJ Q&A session, March 4, 2021): 

“I think the Fed established its credibility several decades ago on inflation and since that time the connection between having a lot of people out of work and inflation under control has gotten very, very weak. 

So, our new framework very explicitly takes that new learning, that new understanding, and says that we won’t raise the interest rates to cool down the economy just because unemployment gets lower - just because employment gets high. 

We’re going to wait to see signs of actual inflation or the appearance of other risks that could threaten the achievement of our goals. 

And we’ve seen that the economy can sustain very low levels of unemployment without inflation.”


“So many people, particularly people who are now entering the job market, will not have lived through high inflation. 

And high inflation is a very bad state of affairs. And it hurts people the most on fixed incomes and lower incomes… 

Inflation was very high when I was in college and coming into the job market. 

So, it’s really not something we want. 

But I would say, at the Fed, we are well-aware of the history and how it happened and [we’re] not going to allow it to happen again. 

It was a situation where the Fed didn’t step in when it should have, when inflation pressures were building. 

Not at all the current situation. Inflation is currently running below 2%. 

It’s running at 1.5%. But we’re very mindful of what happened in really the 1960s and 1970s and determined not to repeat that mistake.”


“The key thing is to keep longer-run inflation expectations anchored at 2%. 

If that happens then a transient increase in inflation will not affect inflation over a longer period. 

And we intend to use our tools to keep inflation expectations anchored at 2%, which gives us the ability to do all the things we do when the economy is weak.”

It’s reasonable to conclude markets were disappointed by Powell not directly addressing potential yield suppression measures. 

I’ll assume the Fed would at this point prefer to save its “operation twist” (sell T-bills to purchase longer-term Treasury bonds) announcement to spring on the markets in the event of more serious instability. 

Echoing governor Lael Brainard, Powell said the Fed didn’t want to see “disorderly conditions” or a “persistent tightening in broader financial conditions.” 

This signals the Fed’s willingness to intervene if necessary, but without risking the possibility of a market selloff on an announcement of actual market support.

But I do discern a bond market increasingly uneasy with the Fed’s cavalier approach to inflation. 

There’s an incongruity that should trouble holders of long-term fixed-income securities: The Fed is not only explicitly stating its intention to disregard an uptick in pricing pressures, its new “inflation targeting” doctrine explicitly seeks to promote a period of above target inflation (compensating for previous below-target price increases). 

Meanwhile, Powell wants to have it both ways. 

He claims traditional resolve, stating the Fed is “determined not to repeat that mistake” when it “didn’t step in when it should have, when inflation pressures were building.”

Does anyone at this point actually believe the Fed would step in to repress inflationary pressures? 

Clearly, they won’t be reacting to nip “building” price pressures – they’ve said as much. 

And I see about zero chance of the Fed moving to tighten financial conditions in the event of inflation gaining a serious foothold. 

By that point, bond markets would surely already be in a state of disarray. 

The FOMC wouldn’t dare tighten during a period of market tumult.

One could argue the Fed retains credibility today when it comes to its “whatever it takes” crisis-fighting resolve. 

It has essentially committed to erring on the side of a continuation with runaway balance sheet expansion. 

This bolsters its credibility in handling market instability as well as a reemergence of disinflationary pressures – the two key risks weighing on markets over recent years.

But rather suddenly, there’s a third major risk: rising consumer price inflation. 

And the problem is there’s no reason these days to afford the Fed any credibility when it comes to controlling a reemergence of heightened inflationary pressures. 

We will never witness the “whatever it takes” mindset employed to secure a “WIN” – Whip Inflation Now. 

Powell’s “we intend to use our tools to keep inflation expectations anchored at 2%, which gives us the ability to do all the things we do when the economy is weak” rings hollow. 

The five-year Treasury inflation “breakeven rate” rose another six bps this week, surpassing 2.5% Thursday for the first time since July 2008. 

The adoption of QE as a routine (crisis and non-crisis) policy measure essentially rendered obsolete the Fed’s capacity “to keep inflation expectations anchored at 2%” through the entire cycle. 

Aggressively employing QE to counter inevitable late-cycle market instability (i.e. September 2019) placed the Fed in the precarious position of reinforcing Bubble markets. 

Go there and there’s no turning back. 

As we’ve witnessed – having been spurred on by the pandemic – the amount of stimulus necessary to support Bubble markets and economies inflates exponentially. 

Inflationary pressures are now mounting, while inflationary dynamics are becoming increasingly entrenched – at home and abroad. 

And while the future is as murky as ever, bond markets can’t trust the Federal Reserve (or global central bank community) to keep inflationary expectations anchored. Powell’s clutching of a crumbling myth is not confidence inspiring. 

March 5 – Bloomberg (Jack Pitcher, Ameya Karve and Priscila Azevedo Rocha): 

“Signs of caution mounted in corporate credit markets globally as longer-term Treasury yields kept rising on Friday, leading some borrowers from New York to Tokyo to delay bond sales and strategists to caution about trouble ahead. 

Gauges of credit fear jumped in Europe for investment-grade and high yield debt on Friday in derivatives markets. 

Two borrowers that had expected to sell bonds in the U.S. opted to push their offerings into next week, after a stronger-than-expected jobs report brought fresh inflation concerns and lifted the 10 year Treasury yield briefly above 1.6%.”

March 5 – Bloomberg (Davide Scigliuzzo and Katherine Doherty): 

“Junk-bond investors appear to have their limits after all. Following several weeks of talks with potential creditors, Ronald Perelman’s Vericast Corp. is scrapping a $1.775 billion bond sale after struggling to agree on terms… 

The scrapped sale proves the junk-bond frenzy that’s allowed a growing list of troubled companies to take advantage of record-low costs to refinance debt and push out maturities has its bounds. 

The deal is the first to be pulled in the U.S. junk bond market in four months…”

High yield Credit default swap (CDS) traded up to 314 bps in early Friday trading, the high since February 1st. Investment-grade CDS rose to 57.5 bps – the high since January 29th. 

And while these prices remain a fraction of last March’s highs (886 and 159 bps), it does appear CDS prices are poised to move higher after benefiting from months of liquidity excess and aggressive market risk embracement.

To this point, however, U.S. corporate Credit has been a sideshow. 

March 4 – Bloomberg (Stephen Spratt, John Ainger and Alexandra Harris): 

“The cost of borrowing U.S. Treasury 10-year notes continues to spiral higher despite record-size auctions, fueled by a growing pool of investors who want to bet on higher yields. 

The interest rate on overnight cash loans backed by the newest 10-year note -- repurchase agreements, or repos -- plummeted below minus 3% Wednesday for only the third time since the beginning of 2018, according to Scott Skrym of Curvature Securities LLC. 

That’s the threshold below which it’s cheaper to pay a regulatory fine than to complete the transaction, and it’s an indication of huge demand to be short the issue after last week’s selloff pushed its yield to a one-year high.”

March 5 – Bloomberg (Alexandra Harris): 

“The Federal Reserve looks poised to disappoint Wall Street by not extending an emergency exemption that’s propped up the Treasury market since last year’s pandemic panic. 

After bond market liquidity dramatically disappeared a year ago, the Fed let banks stop factoring in Treasuries to their so-called supplemental liquidity ratios -- letting them stockpile U.S. debt without breaking regulations. 

That exemption expires March 31, and central bankers have given no indication it’ll get authorized for longer. 

The impending expiration, some say, is a reason why Treasuries just suddenly got so volatile. 

Disorderly trading provides a justification for regulators to keep the SLR exemption, Bank of America strategists Ralph Axel and Mark Cabana wrote... 

They don’t expect an extension, but said there’s some alternatives that could help.”

I won’t delve into the “SLR” (supplemental liquidity ratios) issue. 

And while it has become a more salient concern following recent bond market liquidity challenges, I would tend to put more weight on mounting inflation risk, hedging-related selling and deleveraging as key factors behind Treasury market volatility, surging market yields and liquidity issues. 

With unprecedented Treasury and corporate bond issuance at record low yields, markets have never been exposed to today’s level of interest-rate/duration risk. 

This explains why equities have become hypersensitive to every tick increase in Treasury yields – recognizing today’s heightened risk of a backup in market yields turning disorderly and destabilizing. 

I’ll assume at this point that some of the sophisticated operators playing the speculative Bubble blow-off have begun to take chips off the table.

A number of market darlings have been under pressure. 

This week saw double-digit losses for Moderna (14.6%), Twitter (13.1%), Peloton (12.7%), Tesla (11.5%) and Zoom (9.7%). 

Crazy volatility has returned. 

The Nasdaq100 (NDX) was down nearly 2.0% in Friday morning trading, only to rally almost 4% off intraday lows (ending the session up 1.65%). 

The Semiconductors fell 2.4% and then rallied 5.8%. 

While not as dramatic, after being down 1% in the morning the S&P500 rallied 3.2% to more than erase the week’s decline.

For the most part, U.S. equities emerged out of a fog of instability seemingly unscathed. 

Out at the “periphery,” things were more scathing. 

EM currencies were suffering, with Eastern Europe under notable pressure. 

Over the past two weeks, the Turkish lira has dropped 7.5%, the Brazilian real 5.2%, the South African rand 4.3%, the Mexican peso 4.2%, and the Hungarian forint 4.0%. 

The surge in dollar-denominated EM bond yields was ongoing. 

Yields were up 41 bps this week in Turkey, 36 bps in Ukraine, 28 bps in Peru, 24 bps in Brazil, and 20 bps in Saudi Arabia. 

That put the two-week yield spike at 68 bps in Turkey, 62 bps in Ukraine, 56 bps in Brazil, 56 bps in Peru - and those are dollar bond yields. 

In two weeks, local currency bond yields were up 173 bps in Lebanon, 79 bps in Turkey, 70 bps in Colombia, 47 bps in Thailand, and 41 bps in South Africa.

March 5 – Bloomberg (Divya Patil and Rahul Satija): 

“A surge in bond yields is bleeding into Asian markets where at least two state-backed Indian companies and three Japanese firms pulled planned debt sales. 

Indian Railway Finance Corp. and National Cooperative Development Corp. withdrew rupee note offerings Thursday… 

In Japan, Santen Pharmaceutical put off a yen bond sale that it had planned to price Friday, after two other issuers there also paused deals in recent days. 

A jump in the 10-year Treasury yield -- the global bond benchmark -- to a one-year high is sending shockwaves through markets. 

Global credit markets have stumbled in one of their worst weeks this year, with Asian junk bond prices extending their drop this week to the worst since October.”

De-risking/deleveraging has initiated a tightening of financial conditions out at the global “periphery”. 

Not atypically, incipient tightening at the “periphery” provides transitory favor to the “core.” 

The dollar index’s 1.2% gain this week surely lent some support to U.S. Treasuries and securities markets more generally. 

With massive stimulus as far as the eye can see, the U.S. “periphery” (i.e. junk bonds) has so far remained bulletproof. 

Indications of vulnerability began to emerge this week.

I fully expect the tightening of financial conditions at the “periphery” to gravitate to the “core.” 

Despite the Fed’s ongoing $120 billion monthly liquidity injections, I don’t believe the “core” is immune to de-risking/deleveraging dynamics. 

That U.S. equities are in a full-fledged mania and U.S. corporate Credit still demonstrating a powerful Bubble Dynamic complicate the analysis. 

Beijing also creates a high degree of uncertainty. 

March 2 – Wall Street Journal (Jonathan Cheng): 

“China’s chief banking regulator warned about rising risks from the country’s property sector and from global financial markets, underscoring Beijing’s focus on risk controls after a robust pandemic recovery. 

Guo Shuqing, chairman of the China Banking and Insurance Regulatory Commission, told reporters… he was concerned about what he called a ‘bubble’ in Chinese real-estate prices, which he said could threaten the country’s financial sector and its broader economy. 

‘Many people buy homes not to live in, but to invest or speculate. 

This is very dangerous,’ said Mr. Guo, comparing the property bubble to a ‘gray rhino’—an obvious but neglected threat. 

Mr. Guo also warned about the possibility of spillover from what he described as asset bubbles in global financial markets, which he added were out of sync with real-world economic conditions.”

March 5 – Bloomberg: 

“China’s government set a conservative economic growth target for this year, shifting its focus from recovery mode to longer-term challenges like reining in debt and reducing technological dependence on the U.S. 

The growth target was set at above 6%, well below economists forecasts, with the budget deficit expected to fall to 3.2% of gross domestic product… 

In sharp contrast to places like the U.S., where the Biden administration is trying to push through a new $1.9 trillion stimulus package, Beijing outlined a plan to normalize policy now that the pandemic is under control domestically and the economy has bounced back. 

The target for 2021 stands in contrast to the 8.4% expansion that economists predict…”

Beijing recognizes it faces acute Bubble risk both at home and from abroad. 

Unrelenting U.S. fiscal and monetary stimulus - with resulting massive trade deficits - ensures powerful inflows into China. 

This only further complicates Beijing’s already great challenge of reining in Bubble excess without unleashing the forces of risk aversion, panic and collapse. 

I’ll take this week’s announcements as indicating that Beijing believes it must sacrifice growth to mitigate escalating risks associated with over-indebtedness and asset Bubbles.

Surging global yields, fragile equities Bubbles, and prospective Chinese tightening measures. 

That’s a confluence of risks that beckon for a more cautious approach to leverage and risk-taking more generally. 

Indeed, today’s backdrop places myriad levered strategies in harm’s way. 

I’ll assume the global leveraged speculating community – the marginal source of finance globally – has commenced de-risking/deleveraging. 

Issues in the “repo” and dollar swaps markets point to mounting stress in derivative hedging markets. 

In sum, the volatility experienced across markets over the past couple weeks indicates growing risk of a financial accident. 

Joe Biden’s $1.9tn package is a risky experiment

It might be no bad thing if the US fiscal stimulus ended up somewhat smaller than now proposed

Martin Wolf 

   © James Ferguson

How much fiscal stimulus is too much? 

The debate on this question among economists who support the goals of Joe Biden’s US administration has become fierce. 

That is no bad thing: policy should be debated. 

In this crisis, as during the 2008 financial crisis, one has to evaluate the risks of doing too little against those of doing too much.

But one thing is clear: the fact that too little stimulus was delivered in 2009 does not mean that far more than that must be right today. 

Policy must be judged by its suitability in current circumstances while recognising the uncertainties and balance of risks.

I have no objection in principle to huge fiscal spending. 

Indeed, in January 2009, I argued that the US should run a fiscal deficit of 10 per cent of gross domestic product until the damaged balance sheets of the private sector were healed. 

Shortly thereafter, I argued that we had to learn from Japan if we were to understand the dangers then confronting western economies. 

I have also recognised from the start that a pandemic is an emergency, rather like a war. Policy did indeed need to go on a war footing.

Nevertheless, it is vital to recognise what makes a pandemic different from a financial crisis or a war. 

Unlike a financial crisis, Covid-19 will not necessarily create an overhang of bad private debt likely to suppress demand indefinitely. 

Instead, the balance sheets of people who have earned well and spent little have actually improved. Again unlike a war, the pandemic does not destroy physical capital. 

There is a good chance therefore that economies will recover really strongly, once fear of the disease has waned. 

If so, the dominant part of the planned fiscal policy response should aim not so much at short-term relief as at “building back better”, by promoting a sustained increase in public and private investment.

This is the context in which the debate on the Biden administration’s $1.9tn fiscal package needs to be understood. 

It is not a philosophical debate, but one over the size, timing and nature of the package. 

The protagonist has been Larry Summers, former US Treasury secretary and chief economic adviser to Barack Obama, supported by Olivier Blanchard, former chief economist of the IMF. 

Both are Keynesians and supporters of the Biden administration. Summers even developed the “secular stagnation” theory, which justifies reliance on fiscal policy.

Summers recently questioned the wisdom of the package in the Washington Post. 

He argued that stimulus equal to 13 per cent of GDP (the $900bn that has already been enacted plus the $1.9tn) “was very large, especially in an economy with extraordinarily loose financial conditions, reasonably rapid growth forecasts, still unmet public spending needs and a very big overhang of private saving. 

Budget deficits in 2021 on the proposed plans will quickly be approaching the record World War II levels as a share of the economy.”

This is undoubtedly a reasonable concern. 

The growth of the broad money supply is extraordinary. 

The IMF forecasts only a modest gap between actual and potential GDP in the US in 2021. 

It is quite possible that monetary and fiscal expansion on this scale will hugely overheat the US economy. 

Against this, we see no significant resurgence in inflation expectations, while excess capacity is likely to endure in the world economy as a whole.

Some analysts seem to view a big upsurge in inflation as inconceivable, because it has not happened for a long time. 

This is a bad argument. 

Many once thought a global financial crisis was inconceivable because it had not happened for a long time. 

In the 1960s many thought the inflationary upsurge of the 1970s similarly inconceivable.

Many seem to believe nowadays that lower unemployment will not raise inflation. But at some point excess demand is sure to raise prices and wages. 

At that time, inflation expectations will start shifting permanently upward. 

The 1970s and 1980s taught us that bringing them down again is very costly, not just economically, but to the credibility of government.

These concerns should not be taken as an argument against any further US fiscal package. 

But if Biden could ignore political timing, it would make more sense to go for a smaller support package now and propose a huge medium-term investment programme later on. In the meantime, he would see how the recovery went before proposing another short-term support programme. 

But the administration’s view clearly is that it has a window of opportunity to alter people’s lives and so must “act big” now, and not later on. 

It also clearly believes the balance of peril lies far more on the side of doing too little than on that of doing too much. 

One must hope the judgment it is making in promoting this huge package proves correct.

What is clear is that a big package will be even more important to the eurozone, where the economic impact of Covid-19 on GDP was worse than in the US and the recovery seems sure to be weaker. 

Nor is this an argument against shifting the balance of stimulus from monetary to fiscal policy. Such a shift is desirable, given how aggressive monetary policy tends to promote excessive risk-taking in finance.

If enacted, the $1.9tn package will be a risky experiment. It might be no bad thing if it ended up somewhat smaller than now proposed. 

Whatever is decided, one point is clear. The success of the package is of immense importance. 

Proving that an active government can deliver good things to the public is essential for the health of American democracy. 

I pray that the Biden administration’s gamble succeeds.


Vaccination is going well in Chile. Why not its neighbours?

Jabbing is politicised in much of Latin America

Each day this week some 100,000 Chileans aged 60 to 64 turned up to get their inoculation against covid-19. 

Having vaccinated nearly 20% of its adults, the sixth-best performance in the world, Chile is on track to meet its target of covering 80% of its 19m people by June 30th. 

After starting with health workers, the jabs are being applied in strict descending order of age, a different year each day, and to teachers, too.

This swift and orderly programme contrasts with the rest of Latin America. 

In vaccination as in other matters, the region displays its divisions, inequalities and problems of governance. 

In this case, sadly, they will cost lives. 

Colombia, Ecuador, Venezuela and several smaller countries have barely started jabbing. 

Mexico, with 2% of its people vaccinated on March 1st, is below the world average of 3.5%. 

In Brazil (4%) vaccination trails behind the new p.1 variant of the virus, which spreads faster than the original and seems to disregard prior natural immunity. 

This week the health secretaries of Brazil’s 27 state governments declared that the country is suffering “the worst moment” of the pandemic.

The slow roll-out is largely because of the worldwide shortage of vaccines, especially from Western drug firms whose supplies have gone mainly to their home markets.

Argentina, Brazil and Mexico plan to make vaccines but have found it hard to source the active ingredients and vials. Part of the problem is government fumbling. 

Whereas the African Union made bulk pre-purchases, Latin America’s lack of regional co-ordination meant that countries raced against each other, points out Ernesto Ortiz of the Global Health Institute at Duke University. 

In that race, Chile did two things right: in mid-2020 it agreed with several pharma companies to host vaccine trials to encourage early delivery; and its immunisation programme has an up-to-date digital database. 

Many other governments have struggled with complex procurement negotiations.

The result is “patchiness”, according to Clare Wenham, a health expert at the London School of Economics. 

Different vaccines, different priority groups and different distribution plans could complicate opening up the region’s economies, she thinks. 

This patchiness owes much to political manipulation. 

Vaccine distribution in Brazil has been particularly haphazard, because the federal government of Jair Bolsonaro, a populist who denies the seriousness of the virus, has absented itself from the job.

In Mexico, another federal country, the government of Andrés Manuel López Obrador seized control of the vaccination programme from the states. 

With an important election due in June, it decided that 333 “highly marginalised” municipalities should get the vaccine first. 

Many are rural and less hit by the pandemic than the cities. Teachers have been jabbed before nurses, who are at higher risk.

This is queue-jumping on behalf of a political clientele. Elsewhere it is the powerful who have jumped queues. 

In Peru the health and foreign ministers resigned last month after it emerged that they were among 487 insiders who secretly benefited from sample doses provided by Sinopharm, a Chinese company, as a sweetener; another was Martín Vizcarra, who was ousted as president in November. 

Health ministers in Argentina and Ecuador left after similar scandals. 

These affairs have done no good for the credibility of democracy in their countries. 

They also “play against trust in vaccination programmes”, says Dr Ortiz. Polls suggest vaccine hesitancy has risen in Peru since last August.

Those vaccines currently available in the region come mainly from China and Russia, which have been quicker to deliver than their Western rivals. 

China trades a lot with and invests a lot in several Latin American countries. 

Vaccine diplomacy may give it soft power for the first time. 

As for Russia, it had almost disappeared from Latin America since the end of the cold war. 

Now it is back, and in a benign guise.

Vaccination is a marathon, not a sprint. 

By February 27th Latin American countries had ordered 550m doses of Western vaccines, compared with 213m from China and 72m from Russia, according to Duke University. 

Later this year, the Western doses should arrive in force. 

Eventually, both the scandals and the source of the early vaccines may be forgotten if the region acquires immunity and new variants are kept at bay. 

But it is more likely that the botched vaccination effort will have lasting political and diplomatic consequences. 

The odd couple

Vladimir Putin and Recep Tayyip Erdogan have formed a brotherhood of hard power

But the bond is brittle

THE KREMLIN has accused NATO of trying to overthrow Vladimir Putin. 

It has portrayed Alexei Navalny, Mr Putin’s most prominent challenger, as America’s agent. 

It has called the European Union, which condemned Mr Navalny’s poisoning and subsequent imprisonment, an “unreliable partner”. 

But there is one NATO country, and candidate EU member, that Mr Putin is happy with: Turkey. 

Recep Tayyip Erdogan, Turkey’s president, has said nothing about the mistreatment of Mr Navalny or the arrests of thousands of Russians who protested against it.

His silence is testimony to a remarkable entente that has developed between the two authoritarian leaders. It is an improbable relationship. 

Deep historical rivalries divide Russia and Turkey, and their interests collide, sometimes violently, in many areas. Yet the two men share a bond in hard power that is reshaping regional politics and posing awkward problems for Turkey’s Western allies.

Historically, Russia and Turkey have gone to war a dozen times, though not since both empires were transformed in revolution at the end of the first world war. 

The continent-spanning colossi had continuously rubbed up against each other in areas where their interests overlapped, and in many ways they still do. They have, for instance, recently been sparring over the civil wars of Libya and Syria. 

In September they faced each other closer to home in the South Caucasus, which Russia sees as its backyard. 

With Turkey arming and instructing a Turkic-speaking Muslim Azerbaijan and Russia standing behind Christian Armenia, many worried that a conflict over Nagorno-Karabakh, an ethnic Armenian enclave within Azerbaijan, would spread into an even bigger war.

Yet even as Turkey’s drones pummelled the Russian tanks used by the Armenian side, Mr Putin praised Mr Erdogan as someone he could do business with. 

“Working with such a partner is not only pleasant but also safe,” he told an audience of foreign experts at the Valdai Discussion Club in October. 

Mr Erdogan, in turn, saluted Mr Putin by testing the S-400 missile system that Turkey had bought from Russia. In November they ended the fighting by striking a bargain that gives Russia a military presence in Nagorno-Karabakh and Turkey an economic stronghold in the South Caucasus.

That deal represents one of the biggest geopolitical shake-ups since the end of the cold war, when Russia and Turkey were on opposite sides. It also carries a message about the use of hard power and the reality of a multipolar world. 

“They both understand that it is not the balance of forces that matters, but the readiness to use it,” says Andrey Kortunov, head of the Russian International Affairs Council. America may have had a superior army, but its reluctance to become engaged in Syria left Russia and Turkey in charge of that war-torn region. 

And after nearly 30 years of fruitless talks over Nagorno-Karabakh, it was Turkey’s military backing and Russia’s acquiescence that helped Azerbaijan regain territory and shake up one of the most entrenched conflicts in the Caucasus.

To Mr Putin, this was a demonstration of a new multipolar order, something he had been advocating since 2007, when, at the Munich Security Conference, he first took issue with the post-cold-war order with its “one centre of authority, one centre of force, one centre of decision-making”. Russia’s mission was to constrain America’s new hegemony.

Nagorno-Karabakh was not the first time Russia had collaborated with Turkey to minimise the influence of Western powers. In the aftermath of the Bolshevik revolution and the collapse of the Ottoman empire, Kemal Ataturk briefly saw Lenin as an ally against the imperial West and the Bolsheviks saw Turkey as an accomplice in their quest for world dominance. 

The Bolsheviks supplied Turkey with arms to fight the Greeks and the British, and the Turks acquiesced to the Bolsheviks taking control of the oilfields of Azerbaijan and establishing their rule in the South Caucasus. The deal between Ataturk and Lenin in 1921 that established Turkey’s north-eastern border and limited its presence in the South Caucasus has held ever since.

Last year’s war over Nagorno-Karabakh was a mirror image of that deal. It is now Mr Putin who is wooing Turkey in his confrontation with the West, hoping to use it as a wedge in NATO, while Mr Erdogan is projecting Turkey into its former spheres of influence. 

The warmth is all the more remarkable given that Turkey is the only NATO country to have collided with Russia militarily in recent years. In 2015 Turkey shot down a Russian warplane that had violated its airspace after flying over Syria.

Russia responded by imposing sanctions against Turkish products, ordering Russian tourists to stay away from Turkish beaches and bombing ethnic Turkmen fighters in northern Syria. Turkey found it impossible to pursue Islamic State (IS) and Kurdish PKK militants on the Syrian side of the border. 

To rub it in, Russian officials and media outlets accused members of Mr Erdogan’s family of buying oil from IS. As one Turkish official later said, “We played hard, and they played harder.”

The thaw

What changed? 

The relationship began to improve in the summer of 2016, when Mr Putin commiserated with the Turkish president after an abortive coup in Turkey that killed some 270 people. “Putin called immediately,” says a Turkish official. 

“Like the guy or not, he was smart enough to show solidarity.” Most Western leaders were slower to do so. Mr Erdogan travelled to Russia, where he signed a gas-pipeline deal and agreed to resume work on a Russian nuclear plant in southern Turkey. The two pilots who had downed the Russian plane in 2015 ended up in prison, charged with being involved in the coup.

“The fighter-jet crisis was a turning-point in how Turkey dealt with Russia,” says Emre Ersen, a Russia expert at Marmara University in Istanbul. “After NATO didn’t run to Turkey’s help, Turkey understood that the only way to advance its interest in Syria was by agreement with Russia. That agreement still holds.”

Since 2016 Mr Erdogan has held more face-to-face meetings with Mr Putin than with any other leader. Russia has turned from being Turkey’s opponent in Syria’s civil war into its most important partner there. 

Turkey has been able to carry out its military operations in northern Syria only with Russian consent. 

Meanwhile, Russian news outlets have made inroads among Turkish audiences. Mr Erdogan’s inner circle now includes a group of “Eurasianists”, who are open to co-operation with Russia and China and hostile towards Europe and NATO. Turkey’s government and its propaganda machine now play up tensions with the West as much as they tend to downplay tensions with Russia.

The decision to buy the S-400 air-defence system is the most consequential element of the new relationship so far. Two years ago Mr Erdogan called the purchase “the most significant deal in our history”. 

The system has not come cheap. The price Turkey paid included $2.5bn for the hardware itself, and also expulsion from America’s F-35 programme and the accompanying loss of $9bn in contracts for the Turkish arms industry. 

In December America imposed additional sanctions against Turkey’s defence-procurement agency.

Mr Erdogan may have been desperate for a weapons system that could counter the kind of threat that arose in the coup in 2016, when Turkey’s own F-16s bombed his palace compound. 

Many of Mr Erdogan’s supporters believe, improbably, that America had a hand in that coup. In February his interior minister openly accused it of orchestrating the violence. 

There were also rumours that Russian military intelligence tipped off Mr Erdogan about an imminent threat to his life.

Into the American vacuum

In Syria, the Turks say they had no choice but to do business with Russia, as America shied away from confrontation with the regime, drawing red lines but failing to take decisive action. 

Turkey also bristled at America’s decision to outsource the ground war against IS to the Kurds. Turkish officials say America not only allowed Russia to emerge as the main power broker in Syria but alienated Turkey by teaming up with the PKK’s local offshoot.

Occasionally clashes between Turkey and Russia still occur, as when, a year ago, a Turkish convoy got hit by Russian jets in the service of the Syrian army. The strike killed at least 36 Turkish soldiers. Yet Turkey was careful not to confront Russia directly and blamed the attack on Syria’s president, Bashar al-Assad.

For his part, Mr Putin was equally accommodating, and allowed Turkey to take retribution and pummel Syrian positions with combat drones while Russian jets stayed grounded. As far as Mr Putin is concerned, using Turkey to undermine NATO is even more important than helping Mr Assad in Syria. 

The same motive partly explains Russia’s acquiescence in Azerbaijan’s war over Nagorno-Karabakh, and its military backing from Turkey. Mr Putin has managed to convert Russia’s role as a mediator there into getting military boots on the ground, in the shape of peacekeepers. 

Turkey has won both prestige in the region and a promise of a transport corridor through Armenia to Baku, which could join up with China’s Belt and Road Initiative. 

The West got nothing.

Trade and investment also play a part in binding Turkey to Russia. Because Russian energy exports make up the bulk of their trade, Turkey has a gaping $13.4bn deficit with Russia. 

“But we shouldn’t underestimate business ties,” says Behlul Ozkan of Marmara University. “Turkish construction companies close to the AK (Mr Erdogan’s party) are getting big tenders.” 

Between 2010 and 2019, Russia was by far the leading market for Turkish contractors, with over $40bn in completed projects.

Mutual support

Those ties have come to matter especially because both leaders are presiding over struggling economies (see chart 1). In Turkey inflation and unemployment have remained in double digits since 2018. In less than four years, the Turkish lira has lost half of its dollar value. 

Russia’s stagnant economy and a six-year-long decline in real incomes have fuelled broad discontent with the Kremlin. Both Mr Putin and Mr Erdogan have fallen back on the idea of each of their countries being a “besieged fortress” surrounded by enemies, and resorted to aggression abroad to distract attention from troubles at home.

Broader trends are at work, too. Turkey and Russia share a sense of bitterness about being excluded from Europe. Turkey’s attempts to join the EU have been rebuffed for nearly six decades. 

The belligerent and authoritarian Turkey of today clearly has no place in the club. 

But such is the mood in Europe, and such the fear of a Muslim nation of over 80m people, that Turkey would probably not be allowed in even if it became a thriving democracy.

Both autocrats share a nostalgia for empire. Mr Putin portrays himself as a patriot who is rebuilding parts of the Soviet empire, and has waged wars against Georgia and Ukraine. He strives to keep what he sees as client states, most recently Belarus and Armenia, on a tight leash. 

Mr Erdogan has placed his country’s Ottoman past in the service of a more aggressive foreign policy, making noises about restoring Turkish rule over Greek islands hugging its Aegean shores, and confronting Greece, Cyprus and France in the gas-rich eastern Mediterranean. 

He fancies himself the voice of the Islamic world.

“Erdogan has the kind of personal relationship with Putin that he doesn’t have with many Western leaders,” says Mr Ersen. “Both are strongmen who are not challenged at home, and each knows the other has the power to implement the decisions they reach.” 

Mr Erdogan knows the deals he cuts with America risk being derailed by independent bureaucracies, public pressure and Congress. With Mr Putin, he does not need to worry about any of that.

Mr Erdogan has also been an attentive student of Mr Putin’s embrace of foreign policy by fait accompli. Russia bloodied Turkey’s nose in Syria and captured valuable turf to its north by annexing Crimea. 

“Erdogan recognised the value of hard power,” says Suat Kiniklioglu of the German Institute for International and Security Affairs. After Crimea, Turkey’s leader realised that aggression is not always punished. 

“Ankara sees weakness, disagreement, indecisiveness and confusion in the West, and sees this as an opportunity to intervene in its neighbourhood,” says Mr Kiniklioglu. Mr Erdogan has started to take a few pages out of Mr Putin’s playbook. Russia sent “little green men” and mercenaries to Crimea, the Donbass and Libya. 

Turkey deployed hundreds of Syrian mercenaries to join the fighting in Libya, and then in Azerbaijan, possibly through a private security company. Russia uses gas to exert pressure over European governments. Turkey uses migrants and refugees.

There are, of course, big differences between the two men and the countries they lead. Following a constitutional coup that scrapped the limit on his presidential terms, Mr Putin has moved much closer to dictatorship (though anger at the imprisonment of Mr Navalny may yet loosen his grip). 

Mr Erdogan’s power is less firmly entrenched. Turkey’s biggest conglomerates are run by members of the secular class, who accommodate the president but do not love him. Mr Erdogan has locked up many of his opponents, defanged the media and taken control of the courts, but still has to deal with tightly-contested elections. 

His party’s support in the polls has been slipping. Two years ago it lost control of Istanbul, the country’s economic motor, and Ankara, its capital, in local elections.

Vive la différence

Russia and Turkey are still far from, and may never conclude, a true alliance. “We’re not talking about a strategic partnership,” says Onur Isci, head of the Centre for Russian Studies at Bilkent University. 

“I don’t think Turkey has the luxury of risking the collapse of its whole institutional relationship with the West.” Although the two have co-operated in Syria, they remain on opposite sides of the war. The same is true in Libya and the Nagorno-Karabakh conflict.

The two powers also have largely incompatible interests in Georgia and Ukraine, both of which Turkey would like to see as members of NATO. That is an absolute no-no for Russia, which waged wars to keep both countries apart from the West. As a result, Georgia and Ukraine now both look to Turkey as an important counterforce against Russia, a role that Mr Erdogan has been happy to exploit. 

Turkey has beefed up its economic and defence relationship with Ukraine. In 2019 it sold Ukraine half a dozen of its combat drones, the first such purchase by Ukraine’s army. “Turkey is not the Turkey of thirty years ago,” a Turkish official says. 

“Our defence and economic capacity has improved. We don’t see ourselves as speaking with Russia from a position of weakness.”

Russia and Turkey will look for common ground wherever they can, says Mr Ersen, but they will find it hard to reconcile their interests, especially in the Black Sea and the Caucasus, where Turkey’s position continues to be closer to the West’s than to Russia’s. “Regional problems”, says Mr Ersen, “are the soft underbelly of the Turkey-Russia relationship.” 

Their longer-term prospects diverge, too (see chart 2). Turkey’s demographic outlook and economic-growth prospects are much the brighter. Its population is growing; Russia’s is shrinking.

At present, Turkey is a country unmoored. It is increasingly estranged from the Western alliance. 

But its partnership with Russia is recent, thinly based, and reversible. 

Among the many priorities competing for President Joe Biden’s attention, stopping Turkey’s drift away from the West and into Mr Putin’s arms deserves to be near the top of the list.

If This Isn’t A Blow-Off Top …


Financial history includes plenty of extreme years. 

That’s not surprising, since we’re emotional beings with short memories. 

Combine those two traits and you get cycles, many of which end with a bang.

Even so, this one stands out. 

A full accounting of the ways in which today’s financial markets have exceeded previous bounds of rationality would tax the average reader’s attention span. 

So let’s just hit a few high points.

Home prices up 14% during a recession

In a typical downturn, housing tends to either stagnate or contract, depending on what it did in the preceding expansion. 

This time, home prices had been rising for a solid decade, to levels comparable to the bubble year of 2007. 

Then came the pandemic lockdowns and a deep recession … and home prices spiked. 

14% in one year is epic when you consider that most houses are financed. If you put down 20% on something and it then rises by 14%, the return on the money you actually risked is 70%. In one year. 

While you’re living in it. Almost unprecedented.

Option traders bet the farm

While home prices were soaring, stocks were doing even better, quickly recovering from the “Oh my God it’s a pandemic” flash crash in March of 2020 to blow through all-time highs a few months later. 

Now, options traders – i.e., people who swing for the fences with leveraged bets – are all-in on the bull market. The ratio of puts (bets that stocks will fall) to calls (bets that stocks will rise) is the lowest since the 2000 dot-com mania. As with houses, everyone seems to think the good times are going to roll on, pretty much forever.

Small businesses leverage themselves to the hilt

Small businesses are either struggling to survive or have been gripped by the same euphoria as the rest of the financial system, because their debt to EBITDA (the broadest and most generous measure of cash flow) has spiked to levels last seen, well,  never.

As the Wall Street Journal recently put it:

Companies Aren’t Saving Their Pennies as Markets Turn Bubbly

Thrift is in a bear market as even the riskiest borrowers rush to issue new debt. That world may not last forever.

When money is readily available and almost free, why bother saving for a rainy day?

For corporations, the question is worth asking at a time when dollars might as well be falling from the sky. 

The average rate on so-called “high yield” bonds recently fell below 4% to a record low. 

In the late 1990s, even corporate borrowers with the best reputations paid average interest rates on the order of 7%. 

There is so much money looking for a place to go that companies are being contacted by investors asking if they would like to issue bonds rated below investment grade rather than the other way around.

Buyers snarf up munis from near-bankrupt issuers

The pandemic lockdown has decimated the finances of dozens of states and hundreds of cities. 

Yet it’s never been cheaper for the public sector to borrow money by selling municipal bonds. Today’s low muni-bond yields seem to imply that bond buyers are totally confident in the ability of states and cities to raise sufficient tax revenue to pay off those bonds. 

Why? Read on for the answer.

Crazy valuation Hall of Fame

Valuations in most markets are now extreme. But some things stand out even in this crowd. 

As a Twitter poster recently noted:

Washington To the Rescue

There’s a reason that global investors are willing to buy Italian bonds: The bonds aren’t really Italian. 

Germany, if it wants the eurozone to survive, has to stand behind the paper issued by every member. 

Which means Italian bonds are actually German bonds and are thus likely to pay their creditors on time and in full.

The past year’s blow-off top in US financial assets can be explained in the same way: Tesla stock, a house in Denver, a Chicago muni bond, and a California small business loan will, in the coming mass-bail-out, become obligations of the federal government, which has a printing press capable of not just making the required payments but pushing the price of these things even higher than they are today.

The problem, of course, is that our savior is itself broke despite the printing press. 

It is, in fact, the scene of its own blow-off top, in the form of a deficit that might exceed 15% of GDP in 2021 – for the second straight year — at a time when commodities are starting to spike. 

When those rising prices work their way into food, transportation, and other costs of living, it might be a lot harder to sell promiscuous bailouts as necessary to prevent a deflationary crash.

Are we the greater fool?

To sum up, with everyone everywhere throwing money at overpriced assets on the assumption that the government will bid those assets still higher,  we’re witnessing the greater fool theory taken to its logical extreme. 

Unfortunately, since a national government doesn’t have money of its own, we taxpayers and savers are now the greater fool.

Are Cities Finished?

Far from rendering cities obsolete, as some predicted early on, the pandemic has unlocked an ever-broader potential for renaissance – what the economist Joseph Schumpeter famously called “creative destruction” on an urban scale. The potential rewards are enormous, but there are also considerable risks.

Carlo Ratti, Richard Florida

PARIS – Rue de Rivoli, a boulevard running through the heart of Paris, has been developed in fits and starts. Napoleon Bonaparte initiated construction in 1802, after years of planning and debate, but work stalled following the emperor’s abdication in 1814. 

The boulevard remained in limbo until another military strongman, Napoleon III, completed the project in the 1850s. 

The next century, construction began again – this time, to accommodate cars. 

But this past spring, Rue de Rivoli experienced its fastest transformation yet.

With Paris traffic subdued by a COVID-19 lockdown, Mayor Anne Hidalgo decided on April 30 to close the nearly two-mile-long road to cars, in order to create more space for pedestrians and bicyclists. 

Workers repainted the road and transformed a major artery in central Paris – home of the world-renowned Louvre museum – virtually overnight.

It was not just Rue de Rivoli. Using only paint and screw-in markers, nearly 100 miles of Parisian roads were temporarily reallocated to cyclists in the early months of the pandemic – a revolution in urban reprogramming. 

It was later announced that the changes would become permanent.

The Parisian example highlights the extent to which the pandemic has accelerated the pace of urban innovation, compressing what would have taken years into months or even weeks. 

Beyond highlighting the flaws in pre-pandemic urban systems – such as high levels of pollution – it has allowed city leaders to bypass cumbersome bureaucracy, and respond much more efficiently to the needs of people and businesses.

Those needs are changing fast. 

One of the most discussed changes relates to the separation of home and work. 

In the early days of urbanization, people walked to work. 

Later, they began to take public transport. 

It was only after World War II and the rise of suburbanization that people began to drive cars from their homes to giant factory complexes and office towers.

During the pandemic, remote work has become the rule in many industries – and many companies plan to keep it that way, at least to a large extent. This re-integration of work and home threatens one of the last remaining vestiges of the Industrial Age: central business districts that pack and stack office workers in skyscrapers.

With many workers unlikely to return to their cubicles, old office towers may be transformed into much-needed affordable housing after the pandemic. One-dimensional business districts could become vibrant neighborhoods.

Non-work activities have been transformed as well. 

Dining, entertainment, and fitness have increasingly been moving into the open air, occupying space that used to be designated for cars. 

So, as with the bike lanes in Paris, the pandemic is creating prototypes for a permanently post-automobile, human-centric city. In fact, the changes in Paris are part of a broader plan to create a “15-minute city” (ville du quart d’heure), where core daily activities – including working, learning, and shopping – can be carried out just a short walk or bike ride from home.

So, far from rendering cities obsolete, as some predicted early on, the pandemic has unlocked an ever-broader potential for renaissance – what the economist Joseph Schumpeter famously called “creative destruction” on an urban scale. 

The crisis left governments with little choice but to adopt a fast-paced, trial-and-error approach. The extraordinary innovations in pedestrianization, affordable housing, and dynamic zoning that have emerged highlight the power of positive feedback loops.

Nonetheless, a Schumpeterian approach is fundamentally experimental, and even the best-designed experiments sometimes fail. 

Moreover, the costs of those failures are not borne equally: those with the least influence tend to suffer the most. The COVID-19 pandemic, for example, has disproportionately affected the poor and vulnerable.

In this new age of urban innovation, leaders must take great care to minimize the risks to – and redistribute the returns toward – disadvantaged and vulnerable groups. That means, first and foremost, listening to them. 

The Black Lives Matter movement in the United States is a powerful example of a disadvantaged group demanding to be heard. Leaders everywhere should pay attention and address racial and class divides head on. Urban design is central to any such strategy.

To support this process – and help maintain flexibility and speed in urban innovation after the pandemic – leaders should consider creating participatory digital platforms to enable residents to communicate their needs. 

This could encourage policies that improve quality of life in cities – especially disadvantaged neighborhoods – including by limiting problematic trends like rising pollution and gentrification. Only with an agile and inclusive approach can we seize this once-in-a-century opportunity – or, rather, meet our urgent obligation – to “build back better.”

A stroll along Rue de Rivoli today reveals none of the desolation and dullness we have come to expect on city streets during the pandemic. 

Instead, the storied boulevard is bustling with masked Parisians, zooming along on bikes, scooters, e-bikes, and rollerblades, or pausing for coffee at cafes and restaurants. A street deadened by the pandemic has been revived. 

With thoughtful planning, bold experimentation, and luck, such transformations can be just the start for cities everywhere.

Carlo Ratti, Co-founder of the international design and innovation office Carlo Ratti Associati, is Director of the Senseable City Lab at MIT.

Richard Florida is University Professor at the University of Toronto’s School of Cities and Rotman School of Management.