Double Trouble 

Doug Nolan

March 1 - Daily Sabah: 

“Turkey’s economy grew a less-than-expected but still robust 5.9% in the fourth quarter of 2020 and 1.8% in the year as a whole…, emerging as one of only a few globally to skirt a contraction amid the coronavirus pandemic… 

The Central Bank of the Republic of Turkey (CBRT), which has repeatedly said it would target inflation more strongly under new Governor Naci Ağbal, has raised its policy rate by 675 bps to 17% since November to cool inflation… 

Inflation is expected to have risen to more than 15% last month… 

Ensuring price stability is Turkey’s main priority in 2021, Minister Elvan said. 

‘Our policies fighting inflation will pave the way for more qualified and sustainable investment, production and growth,’ he stated.”

What a difference a few weeks makes. 

President Erdogan last weekend sacked central bank governor Ağbal after only four months, replacing him with an academic economist critical of rate increases. 

The lira immediately collapsed almost 15%, with a tepid recovery cutting losses for the week to 11%. 

Ten-year lira bond yields surged 420 bps to 17.88%, with dollar-denominated yields up 125 bps to 7.22%. 

One-month deposit rates doubled to 35.5%. 

Turkey’s sovereign CDS surged 160 bps to 466 bps, while the BIST 100 equites index sank 9.6%.

March 23 – Financial Times (Adam Samson, Ayla Jean Yackley and Joshua Oliver): 

“Turkey’s money market showed signs of stress on Tuesday, a day after the president’s firing of a respected central bank chief rattled investors and sparked heavy selling in the country’s assets. 

The offshore overnight swap rate, the cost to investors of exchanging foreign currency for lira over a set period, soared to an annualised 1,400% on Tuesday… 

It had eased to a still-elevated 500% by 3pm in Istanbul. Analysts said the big increase was a sign it was becoming more difficult for foreign investors to hedge their exposure to lira assets, unwind their bullish positions or bet against the currency… 

‘Foreign investors are trying to liquidate long lira positions in a rush this week following the unexpected development over the weekend of the dismissal of the [central bank] governor,’ said Onur Ilgen, head of treasury at MUFG Bank Turkey. 

He said this had triggered a ‘significant liquidity squeeze in the offshore lira swap market’.”

A key to Turkey’s current predicament was buried in Q1 GDP data: “Financial sector activity drove growth in 2020, surging 21.4%, the TurkStat data showed.” 

Crisis Dynamics have been festering in Turkey for a while now. 

Turkish yields spiked in the second half of 2018 as global liquidity tightened, then again under similar circumstances in the summer of 2019 and during the March 2020 pandemic global market dislocation. 

Yet each episode was followed by a further easing of monetary policies by the world’s leading central banks, which led to outsize EM speculative inflows and a loosening of financial conditions in Turkey and EM generally.

Recall that EM received record inflows last November ($107bn), followed by huge flows in January ($53.5bn) and February ($31.2bn). 

With consumer price inflation reaching almost 15% in December and the lira under pressure, Turkey’s new central bank chief hiked rates to almost 17%. 

Such enticing overnight funding rates in a world of scant yields and over-liquefied global markets attracted major speculative “hot money” flows into Turkey’s Bubble.

A glance at Turkey’s debt data is illustrative. 

According to Q4 data from the Institute of International Finance (IIF), Turkey’s debt load in 2020 surged from 138% of GDP to 174%, one of the more pronounced Credit splurges in the EM universe. 

Financial Sector debt jumped from 23.6% of GDP to 32.5% in a year, with Government Sector borrowings surging from 34.2% to 47.3%. 

Ominously, much of this debt is denominated in foreign currencies. 

Of Financial Sector borrowings, 79% is foreign currency denominated, with 56% of Government debt non-lira. 

Of Turkey’s $354 billion of non-financial corporate borrowings, a troubling 45% is in foreign currency debt. 

The weaker the lira, the more unmanageable the debt burden.

Turkey is said to have $140 billion of debt coming due over the next year, of which 44% is dollar-denominated. 

But according to MUFG’s Ehsan Khoman (quoted by Reuters), Turkey’s total 2021 external financing requirements exceed $200 billion (in excess of 20% of GDP). 

Meanwhile, Turkey holds only $54 billion of international reserves, down from $81 billion at the end of 2019 and a peak of $113 billion back in 2014.

March 24 – Financial Times (Ayla Jean Yackley): 

“President Recep Tayyip Erdogan has called on Turks to cash in their gold and invest their savings to shore up financial markets roiled by his abrupt decision to sack the central bank chief… 

‘I want my citizens to invest foreign currency and gold kept at home, which is our national wealth, in various financial instruments to benefit our economy and production,’ Erdogan said. 

Financial institutions that comply with Islamic tenets in particular provide customers with favourable returns, he added.”

Erdogan’s desperate call for Turks to “cash in their gold and invest their savings to shore up financial markets” is reminiscent of the devastating 1997 “Asian Tiger” Bubble collapse. 

Turkey would today appear to have all the characteristics of acutely fragile financial and economy structures vulnerable to a currency/debt crisis of confidence. 

Sure, Turkey has repeatedly dodged bullets over recent years, bailed out by the loosest global financial conditions and associated yield-searching “hot money” EM flows imaginable. 

But will global markets once again prove so accommodative? 

I have serious doubts.

My thoughts returned this week to 2014 and an exceptional research report from Merrill’s Ajay Kapur, Ritesh Samadhiya and Umesha de Silva’s: 

“Pig in the Python – the EM Carry Trade Unwind.” 

“Since 3Q2008, the US Federal Reserve QE has unleashed a massive $2 TN debt-driven carry trade into emerging markets, disproportionately increasing their forex reserves (by $2.7 TN from end-3Q2008), their monetary bases (by $3.2 TN), their credit and monetary aggregates (M2 up by $14.9 TN)…”

The premise of the report was that, with Fed QE winding down, EM economies were at heightened vulnerability to a tightening of global financial conditions. 

More specifically, EM asset markets and economies had been inflated by an unprecedented surge in debt, much of it denominated in foreign currencies and financed through levered “carry trades.”

Was the “Pig in the Python” analysis flawed, or is it more a case of the global Bubble somehow stretching out for another six years? 

To be sure, massive post-2008 EM “carry trade” leverage did not unwind. 

And while the Fed did put QE on hold for a few years, the FOMC was loath to actually tighten financial conditions. 

Meanwhile, the Chinese Credit boom went to unimaginable extremes. 

Since the end of 2014, China’s banking system assets surged $23 TN, or 86%, to an astounding $50 TN. 

The big “Pig in the Python” has since 2014 been cultivated to carouse and replicate. 

In rough terms, six years and Double the Trouble.

Overall global debt (from the IIF) ended 2020 at $281 billion, having increased $24 TN, or 9.3% for the year. 

This was up from about $215 billion to end 2014. 

As a percentage of GDP, total global debt jumped to a record 355% from 2019’s 320%. 

And from the IIF, “EM debt/GDP topped 250% in 2020, up from 220% in 2019.” 

EM ended 2020 with a staggering $8.6 TN of foreign denominated debt. 

It’s worth noting, as well, that key EM countries ran quite large fiscal deficits in 2020, including South Africa at almost 12% of GDP along with Turkey, Indonesia, Nigeria and Brazil all near 6%.

Brazil’s local currency 10-year yields surged 46 bps this week to 9.19%. 

Yields are up 234 bps so far in 2021 to the highest level since December 2018. 

Brazil CDS jumped 30 this week to a five-month high 222 bps. 

The Brazilian real sank 4.6% this week, increasing 2021 losses to 9.7%. 

Colombian yields jumped 22 bps to 6.90% (up 151bps y-t-d), with the peso down 3.2% this week (down 6.5% y-t-d). 

Chilean yields jumped 23 bps this week to 3.49% - to highs since March 2020, with the Chilean peso down 1.8%. 

Despite Friday’s 15 bps drop, Mexico’s local bond yields rose nine bps this week to 6.77% (up 125bps y-t-d), with the peso’s marginal decline pushing y-t-d losses to 3.3%. 

The Russian ruble declined 2.1% this week, with the South African rand falling 1.8%.

And while EM bonds and currencies have been under significant pressure, there is generally little concern at this point for a systemic emerging market crisis. 

Indeed, this week’s eruption of instability in Turkey coincided with a rally in the major U.S. equities indices. 

There were some incipient indications of fledgling risk aversion early in the week (i.e. higher corporate and bank CDS prices), along with a drop in energy prices. 

At Thursday lows, the small cap Russell 2000 Index was down 8.2% for the week (a late rally cut losses to only 2.9%). 

Yet, for the most part, heightened instability at the “Periphery” underpinned the “Core.” 

The dollar index gained 0.9% to a four-month-high. Importantly, after trading as high as 1.75% last Friday, 10-year Treasury yields were down to 1.59% by Wednesday – as safe haven bids developed for Treasuries, bunds and JGBs. 

Instead of inflation trepidation and nightmares of a “behind the curve” Fed impelled to “slam on the brakes,” holders of Treasuries could again daydream of global EM instability, another round of disinflation and QE forever.

The analysis is exceptionally challenging. 

Fundamentals are in place for a major EM crisis, and I see reasonable probabilities of an unfolding crisis in Turkey providing the catalyst. 

We’re seeing significant weakness in key EM bonds and currencies, as I would expect preceding an acceleration of Crisis Dynamics.

Meanwhile, complacency in “developed” markets remains formidable. 

Is systemic crisis even possible while the major central banks are running full speed ahead with zero rates and QE? 

Especially after 2020's mind-blowing crisis response, it’s not irrational for markets to assume “whatever it takes” central banking has everything well under control. 

I am, however, reminded of the summer of 1998. 

The IMF, Federal Reserve and global central bank community had pulled the global system back from the 1997 (Asian/EM) crisis precipice. 

At July 1998 highs, the S&P500 was up 22% y-t-d, with U.S. Bank stocks gaining better than 25%. 

Indications of fledgling global instability were easily disregarded: “The West will never allow Russia to collapse.” 

Only weeks following record highs, markets were caught incredibly unprepared for the Russia/Long-Term Capital Management debacle. 

In less than three months, the S&P500 dropped more than 20%, and the Banks sank (at their lows) 40%.

I’ll briefly outline why I believe markets are much too complacent regarding unfolding EM instability. 

Despite ongoing QE, global financial conditions have begun to tighten. 

China has commenced a process of tightening system liquidity and curbing excessive Credit growth. 

While this has been initiated with understandable cautiousness, I expect the strength of China’s economic recovery to provide Beijing the confidence necessary for a determined effort to impose restraint.

Inflationary pressures are mounting globally. 

Turkey, Brazil, and Russia have all recently moved to raise rates to counter a significant jump in inflation. 

Mexico and others will likely follow. 

I expect central banks in both the developing and developed worlds to be compelled to pull back some excess liquidity while attempting to restrain overheated Credit systems. 

While the Fed, ECB and BOJ have for now firmly dug in their heels, heightened inflationary pressures have begun to impinge upon central bank flexibility.

After such a historic year of monetary inflation, efforts to pull back will expose myriad fragilities. 

Unparalleled debt and speculative leverage in a backdrop of rising inflation risk and more cautious central bankers create a high-risk backdrop. 

Toss in an epic speculative mania in equities, derivatives trading, cryptocurrencies and the like, and it’s difficult to envisage an environment fraught with greater risk. 

All eyes on the global leveraged speculating community.

I believe a major de-risking/deleveraging cycle has begun. 

In particular, various hedge fund strategies have suffered losses and been forced to pare some risk and leverage. 

Long/short strategies have been hurt by out of control speculation, market dislocation and a phenomenal short squeeze. 

Various factor “quant” strategies have also suffered at the hand of anomalous market behavior. 

Surging Treasury yields have hurt "risk parity" and myriad levered strategies. 

Now popular EM and “carry trade” strategies are taking body blows.

And despite Trillions of QE, there remain deep-seated liquidity issues. 

The Treasury market, the ETF universe, corporate Credit and derivatives are all liquidity accidents in the making – and all have been providing inklings of serious issues. 

And that gets to the heart of the problem with contemporary Bubble Finance: it works almost miraculously on the upside, though will quickly succumb to illiquidity, dislocation and crisis on the downside.

Turkey’s crisis has pushed EM Crisis Dynamics forward. 

De-risking/deleveraging in Turkish instruments will marginally reduce global liquidity while stirring risk aversion. 

There was notable contagion this week, most visibly with vulnerable Brazil. 

Vulnerability is systemic – for EM and the entire world.

The week also indicated the worst-case scenario is anything but a longshot. 

Instability at the “Periphery” feeds “Terminal Phase Excess” at the “Core.” 

A faltering EM stokes speculative flows to booming U.S. and “developed” currencies, equities market manias, and corporate Credit. 

The Manic “Core” douses fuel on the burning “Periphery” – Double Trouble. 

Things turn really crazy at the end of cycles. 

Monetary Disorder, Manias and Market Dysfunction. 

The parallels to 1929 turn only more compelling and ominous. 

The fallout from Hong Kong

How to deal with China

An epic global contest between autocracy and liberal values lies ahead

Last week China slapped down democracy in Hong Kong. 

The imposition of tight mainland control over the territory is not just a tragedy for the 7.5m people who live there, it is also a measure of China’s determination not to compromise over how it asserts its will. 

After the collapse of the Soviet Union in 1991, liberal values were ascendant around the world. 

The challenge from China will subject them to their greatest test since the early days of the cold war. 

What is more, as the economy of Hong Kong also shows, China is more tightly coupled with the West than communist Russia ever was. 

This presents the free world with an epoch-defining question: how should it best secure prosperity, lower the risk of war and protect freedom as China rises?

Hong Kong defies those looking for a simple answer. 

China has cut the share of directly elected legislators from 50% to as low as 22% and will require that they are vetted for “patriotism”. 

It is the culmination of a campaign to squash liberty in the territory. 

The leaders of the protest movement are in exile, in prison or intimidated by a security law imposed on Hong Kong in 2020. 

Censorship is rising and Hong Kong’s judiciary and regulators will face pressure to show their fealty. 

On March 12th the g7 group of democracies condemned China’s autocratic clampdown, which is a breach of the country’s treaty obligations. China’s diplomats replied with bombastic denials.

You might think the death of liberalism in Asia’s financial centre, which hosts $10trn of cross-border investments, would trigger panic, capital flight and a business exodus. 

Instead Hong Kong is enjoying a financial boom. 

Share offerings have soared as China’s leading companies list there. 

Western firms are in the thick of it: the top underwriters are Morgan Stanley and Goldman Sachs. 

Last year, the value of us dollar payments cleared in Hong Kong, a hub for the world’s reserve currency, hit a record $11trn.

The same pattern of political oppression and commercial effervescence is to be found on the mainland. 

In 2020 China abused human rights in Xinjiang, waged cyber-warfare, threatened its neighbours and intensified the cult of personality surrounding President Xi Jinping. 

Another purge is under way. 

Yet when they talk to shareholders about China, global firms gloss over this brutal reality: “Very happy,” says Siemens; “Phenomenal,” reckons Apple; and “Remarkable,” says Starbucks. 

Mainland China attracted $163bn of fresh multinational investment last year, more than any other country. 

It is opening the mainland capital markets to foreigners, who have invested $900bn, in a landmark shift for global finance.

Moreover, the pull China exerts is no longer just a matter of size—although, with 18% of world gdp, it has that too. 

The country is also where firms discover consumer trends and innovations. 

It is increasingly where commodity prices and the cost of capital are set, and is becoming a source of regulations. 

Business is betting that, in Hong Kong and the mainland, China’s thuggish government is capable of self-restraint in the commercial sphere, providing contractual certainty, despite the lack of fully independent courts and free speech. 

Though China’s best-known tycoon, Jack Ma, has fallen from political favour, foreign investors’ stakes in his empire are still worth over $500bn.

All this is a rebuke to the West’s China policy of recent decades. 

When Western leaders welcomed China into the world trading system in 2001, many of them believed that it would automatically become freer as it became richer. 

When that did not happen the Trump administration tried coercion, tariffs and sanctions. Those have failed, too—and not only in Hong Kong. 

America has led a three-year campaign against Huawei, a firm it accuses of spying. 

Of the 170 countries that use its products, only a dozen or so have banned it.

 Meanwhile, the number of Chinese tech firms worth over $50bn has risen from seven to 15.

One response would be for the West to double down by seeking a full disengagement with China in an attempt to isolate it and force it to change tack. 

The cost would be high. 

China’s share of world trade is three times that of the Soviet Union in 1959. 

Prices would rise as Western consumers were cut off from the world’s factory. 

China makes 22% of global manufacturing exports. 

Western clusters that rely on China would face a shock: tech in America, cars in Germany, banking in Britain, luxury goods in France and mining in Australia. 

Banning China from using the dollar today could trigger a global financial crisis.

Such a price might be worth paying if an embargo were likely to succeed. 

But there are many reasons to think that the West cannot penalise the Chinese Communist Party out of power. 

In the short run, if forced to take sides, many countries might choose China over the West. 

After all, China is the largest goods trading partner of 64 countries, against just 38 for America. 

Instead of isolating China, America and its allies could end up isolating themselves. 

In the long run, unlike the oil-soaked Soviet Union, China is big, diverse and innovative enough to adapt to outside pressure. 

It is testing a digital currency, which could eventually rival the dollar as a way to settle trade. It aims to be self-sufficient in semiconductors.

At least an embargo would encourage China to protect human rights, some will say. Yet isolation tends to strengthen the grip of autocratic governments. 

Cut off from commercial, intellectual and cultural contact with the West, ordinary Chinese will be even more deprived of outside ideas and information. 

The day-to-day contact of 1m foreign-invested businesses in China with their customers and staff, and 40,000 Chinese firms abroad with the world, is a conduit that even China’s censors struggle to contain. 

Students and tourists engage in millions of ordinary encounters that are not intermediated by Big Brother.

Engagement with China is the only sensible course, but how does it avoid becoming appeasement? 

That is the challenge facing the Biden administration, which held a summit with China as we went to press. 

It is at the heart of strategic reviews like the one Britain has just unveiled.

It starts with building up the West’s defences. 

Institutions and supply chains must be buttressed against Chinese state interference, including universities, the cloud and energy systems. 

The creaking American-led infrastructure behind globalisation—treaties, payments networks, technology standards—must be modernised to give countries an alternative to the competing system China is assembling. 

To keep the peace, the cost to China of military aggression must be raised, by strengthening coalitions such as the “Quad” with India, Japan and Australia, and bolstering Taiwan’s military strength.

Greater resilience allows openness and a tough stance on human rights. 

By articulating an alternative vision to totalitarianism, liberal governments can help sustain the vigour of open societies everywhere in a confrontation that, if it is not to end in a tragic war, will last decades. 

It is vital to show that talk of universal values and human rights is more than a cynical tactic to preserve Western hegemony and keep China down. 

That means firms acting against enormities by, say, excluding forced labour from their supply chains. 

Whereas Western amorality would only make Chinese nationalism more threatening, principled advocacy of human rights sustained over many years may encourage China’s people to demand the same freedoms for themselves.

China’s rulers believe they have found a way to marry autocracy with technocracy, opacity with openness, and brutality with commercial predictability. 

After the suppression of Hong Kong, free societies should be more aware than ever of the challenge that presents. 

They now need to muster a response—and to prepare their defences for the long struggle ahead.  

Economies can survive a stock market crash

If a correction is due to higher rates and stronger growth, it would not matter much — except to investors

Martin Wolf

     © James Ferguson

“The long, long bull market since 2009 has finally matured into a fully-fledged epic bubble. 

Featuring extreme overvaluation, explosive price increases, frenzied issuance, and hysterically speculative investor behaviour, I believe this event will be recorded as one of the great bubbles of financial history, right along with the South Sea bubble, 1929, and 2000.”

Thus did Jeremy Grantham, legendary investor and co-founder of GMO asset management, greet the new year. 

Is he right and how much would it matter to the world if he were?

We can indeed, as Grantham told the FT, observe classic symptoms of mania: the rise of amateur traders, frenzied interest in once obscure companies, soaring prices of speculative assets such as bitcoin and hot businesses like Tesla, and the emergence of special purpose acquisition companies, or Spacs. 

These are vehicles for the acquisition of unlisted companies and so a way around initial public offering rules. 

They are modern versions on a vastly bigger scale of the company allegedly created during the early 18th century’s South Sea bubble, “for carrying on an undertaking of great advantage, but nobody to know what it is”. 

That bubble ended badly. 

Will this time be different?

Today’s excesses can be captured in the cyclically-adjusted price/earnings ratio, invented by the Nobel-laureate Robert Shiller. 

This indicator is now at peaks previously seen only in the late 1920s and late 1990s. 

Yet, as I noted in December 2020 and as Shiller had previously, this might be justified by ultra-low nominal and real interest rates.

So the market must be vulnerable to a sharp rise in interest rates. 

But is such a rise plausible? Yes: the recent small rise in yields in long-term government bonds could go further. 

As the OECD states in its Interim Economic Outlook: “Global economic prospects have improved markedly in recent months, helped by the gradual deployment of effective vaccines, announcements of additional fiscal support in some countries, and signs that economies are coping better with measures to suppress the virus.” 

This is good news. 

But if, as a result, monetary policy tightened sooner and yields rose more than generally expected, that good news might be bad for markets.

Yet, even if a market correction hurt investors, would it matter that much for the economy as a whole? 

As the late Paul Samuelson asserted: “The stock market has forecast nine of the last five recessions.” 

Still less do market corrections imply economic depressions. 

A stock market crash would only devastate the economy if policymakers let it do so — as after the crash of 1929. 

The results then were so dire only because the policymakers’ response was so foolish.

There are two ways in which a big stock market correction of the kind Grantham expects might be linked to a significant economic crisis.

The first is if it is a big enough shock on its own to cause economic meltdown. This is very unlikely: the wealth effects of falling stock markets on spending are real but modest.

The second is if the crash is part of an inflationary surge of the kind seen in the 1970s, or of a financial crisis triggered by waves of bankruptcy and the failure of financial institutions, as happened in the 1930s and threatened to recur in 2008. 

Neither can be ruled out entirely.

The economic recovery from Covid-19 may prove far stronger, and the consequences for price and wage inflation more powerful, than conventional wisdom expects. 

This is a bigger risk now than in the aftermath of the 2008 financial crisis. 

Yet it is still a modest one.

Stress tests by central banks and the IMF on core financial institutions indicate that they are robust. 

But there are other possible channels for financial disarray. 

One is the high levels of indebtedness in non-financial corporate sectors of high-income countries; another is the exposure of borrowers outside the US to shocks to dollar funding. 

The combination of a huge US fiscal loosening with sharper than expected monetary tightening might destabilise emerging economies. 

This happened before, notably in the 1980s debt crisis.

In brief, a stock market correction is possible as Covid-19 comes under control, economies normalise and interest rates rise. 

But, in itself, this is not something to worry about much, especially as the effects of a stronger than expected economy versus higher than expected interest rates should offset each other.

Far more serious would be a debt crisis that damages core institutions, freezes markets and creates mass bankruptcies. 

Happily, this looks containable, given the tools available to policymakers. 

Still, unexpectedly high inflation and interest rates could significantly destabilise the world economy for a while.

In the longer run, the world economy would be less fragile if spending were less dependent on aggressive monetary policies and huge accumulations of private debt. 

There are three obvious ways to achieve such a reduction in fragility: improved incentives for private investment; high and sustained levels of productive public investment, and; greater redistribution of income from high-income savers to low-income spenders.

What we should want is a world economy in which Grantham can be right about the prospects for a stock market crash — yet that does not really matter. 

We should also want a world economy where nominal and real interest rates can rise sharply, as economies strengthen and inflation rises, and yet all of this turns out quite well. 

This may even be the world we live in. 

The next few years will show us if we do.

The least bad option

In Peru’s presidential race there is no clear front runner

Eighteen candidates are battling it out in a general election on April 11th

With less than three weeks to go before Peru’s presidential election, opinion polls suggest a clear winner: a nihilist rejection of all 18 candidates. 

Add up the “don’t knows” and those who tell pollsters they will cast blank or spoilt ballots and they come to around 30%. 

But two people must go through to a run-off in June. 

Most of the candidates with a good shot of doing so are populists and outsiders, from both the left and right.

Yonhy Lescano, a left-leaning populist and 20-year veteran of Congress, is the only candidate to poll in double digits (around a measly 13%). 

Representing Popular Action, a long-established but amorphous party, he wants more state intervention in the economy and likes the look of places such as Bolivia (which have it). 

He promises greater oversight of businesses and to stop mining projects if they do not have support among the local population.

Then there is Rafael López Aliaga: unknown until a few weeks ago, he now has 8% in the polls and is rising fast. 

A businessman who is a member of Opus Dei, a conservative Roman Catholic movement, he boasts of his celibacy and of how he scourges himself. 

His critics see him as a Peruvian version of Brazil’s Jair Bolsonaro (he denies this). 

He wants to cut red tape, reform social programmes and boot out a Brazilian construction firm, Odebrecht, which has been the subject of various corruption scandals.

Another contender is George Forsyth, a former football goalkeeper and mayor, who has promised that, if he wins, he will be tough on crime. 

Having long led the opinion polls, Mr Forsyth’s support has slipped recently. 

Opponents say his youth (he is 38) and inexperience render him ill-equipped for Peru’s rough-and-tumble politics, which are more like rugby than soccer. 

Verónika Mendoza, a socialist, and Keiko Fujimori, a right-wing populist, also have a chance of making the run-off.

Whoever wins will face a fractured Congress, also to be chosen on April 11th. 

Its 130 members could be split between as many as 11 parties. 

Since 2016 tensions between the executive and legislature have been a constant feature of political life and the country has had five presidents.

Such a undistinguished crew of presidential candidates is nothing new. 

In 2011 Mario Vargas Llosa, a Nobel-prizewinning novelist, complained that in the elections that year Peruvians had a choice between “aids and cancer”. 

Mr Vargas Llosa’s gruesome quip was in reference to two candidates he felt would be particularly damaging—Ms Fujimori and Ollanta Humala, a former coup plotter who went on to win and who is also running again this year.

The country is crying out for statesmanship it seems unlikely to get. 

It has been buffeted by the pandemic. 

Last year its economy shrank by 11% and unemployment climbed to 13.8%. 

Relative to its population of 33m, Peru has recorded more covid deaths than anywhere else in South America. 

As the title of one of Mr Vargas Llosa’s recent novels declares, these are fierce times. 

lunes, marzo 29, 2021



Poetry and Forecasting

Thoughts in and around geopolitics.

By: George Friedman

Earlier this week, I wrote an analysis about China’s strategy, the kind of piece that is what is expected in this industry. 

I end the week with thoughts that are explicitly geopolitical but are foundational to writing.

Geopolitics is about nations and strategy. 

My approach is to use geopolitics to forecast events. 

But underlying this is a view of the world that may seem out of place in the world of power politics: the consideration of our relationship to the future and the language that must be used to think of the future. 

The consideration of the future is what I do, but sometimes it can be done only from a different perspective – sometimes even from a different language.

All of my work, my passion, is to know the future, the one thing that the gods have been said to deny us. 

That my life’s work is pure hubris is true. 

Hubris is defined as excessive pride. 

In my case it is not pride in what I have done, but rather pride in thinking that it is possible to do it, to know what will happen by knowing how things work.

We expect scientists to know how things work, and we include in scientists social scientists, with whom I am grouped, and which I deplore. 

The work of social scientists is to make great things small, and beautiful things banal. 

I try to avoid that trap by thinking of the world as vast and overwhelming, and trying to glimpse its directions. 

But to forecast is to be poetic, for poets have done some of the finest forecasting, having seen the world not only clearly but in proportion – which is much harder to do.

Heinrich Heine was a German-Jewish poet who wrote in the mid-19th century. 

Of Germany’s future, he wrote:

"Thought precedes action as lightning precedes thunder. German thunder is of true Germanic character; it is not very nimble, but rumbles along ponderously. Yet, it will come and when you hear a crashing such as never before has been heard in the world's history, then you know that the German thunderbolt has fallen at last. At that uproar the eagles of the air will drop dead, and lions in the remotest deserts of Africa will hide in their royal dens. A play will be performed in Germany which will make the French Revolution look like an innocent idyll."

Nazi Germany’s thunderbolt shook the world, and Heine sensed this was coming a century before the sound could be heard. 

How could Heine have done this? 

What did he know that others didn’t? 

He knew the German soul, its energy, rage and self-certainty that made Germany what it was. 

He read what Germans wrote and he believed them, while others patronizingly brushed them aside. 

He also knew that humans do not believe what they see when it seems incredible. And Heine knew that the most common thing is the most incredible thing. 

When I look back on my life, I understand that the enemy of truth is the certainty that what is now will also be later, and all that contradicts it is a fool’s prattle.

Rudyard Kipling also foretold the fate of his own country, and the reason for its fate.

"Far-called, our navies melt away;

On dune and headland sinks the fire:

Lo, all our pomp of yesterday

Is one with Nineveh and Tyre!

Judge of the Nations, spare us yet,

Lest we forget – lest we forget!"

Britain was built on its navy. 

It was an island that lived or died by the sea. 

He saw that the navy would disappear, and while the island might survive, its glory would disappear. 

It once ruled the world and now it hopes that Scotland will retain union. 

Kipling warned of a nation drunk with power whose wild tongues congratulate themselves instead of seeing themselves in the hands of God and not of kings. 

Kipling loved England with a passion, but he had been out in the colonies and had seen the self-glorification that was gnawing at the foundations of the empire. 

Those colonies are no longer British, and Britain’s navy is a shadow of itself. 

Kipling forecast it because as a poet he could see the British soul far more clearly than others could. 

He could sing the song of the recessional as a warning and a certainty.

Both saw greatness in the souls of their countries, and both dreaded what it portended. 

Greatness brings pride, pride brings catastrophe, and the proud don’t listen.

Sometimes the warning is given in general. 

Sometimes a reader is invited to believe the words written speak specifically to them. 

Nathaniel Hawthorne, the American author, wrote:

“It is a curious subject of observation and inquiry, whether hatred and love be not the same thing at bottom. Each, in its utmost development, supposes a high degree of intimacy and heart-knowledge; each renders one individual dependent for the food of his affections and spiritual life upon another; each leaves the passionate lover, or the no less passionate hater, forlorn and desolate by the withdrawal of his object.”

He is the quintessential American thinker, and in recent months I have come to depend more on his guidance on love and hate and our public life. 

We cannot live without love, and we cannot live without hate. 

Each is tied to the other. 

It is comforting that he makes no forecast. 

He is not Heine or Kipling. 

He is an American, comfortable with the linkage of the extreme, and I think he sees it as the engine of the country.

My work is based on what must be done and what can’t be done. 

But the hardest part of my work is to understand the soul, and how it forces things to be done. 

In the past few months, I have been drawn to the problem of the soul more than before, to understand why Kipling felt pride and Heine felt philosophy could guide you. 

Hawthorne makes it clear that the soul, at least the soul of Americans, is at war with itself, which paradoxically stabilizes them. 

German and English smugness destroys them.

It is possible to forecast and absurd to think otherwise. 

Each of us chooses a path that we think will bring us somewhere. 

We know what we will do, but the world and our own virtue determine how it comes out. 

Millions of people are together more predictable than one. 

If we could listen to a Heine, a Kipling or a Hawthorne it would be easier. 

But we don’t listen and we don’t believe that it can be understood. 

And we find poetry alien.

There is, however, one forecast that is certain, courtesy of Homer:

"Any moment might be our last. 

Everything is more beautiful because we're doomed. 

You will never be lovelier than you are now. 

We will never be here again."

That doesn’t seem to be connected to submarines or the South China Sea or the war in Yemen or inflation, but it is. 

Once that is understood, the rest seems to follow.

The Shape of Global Recovery

The accelerating rollout of COVID-19 vaccines in many advanced economies has set the stage for rapid recovery in the second half of this year and into 2022. Although growth in digital and digitally enabled sectors will level out somewhat, high-employment service industries will ride a wave of pent-up demand.

Michael Spence

MILAN – COVID-19 vaccination programs are gaining momentum as production capacity ramps up, and as disorganized and tentative distribution and administration procedures are replaced by more robust systems. 

A task of this size will surely encounter additional bumps along the road. 

But it is now reasonable to expect that vaccines will have been made available to most people in North America by this summer, and to most Europeans by early fall.

As of March 15, Israel has administered more than 100 doses per 100 people, compared to 38 in the United Kingdom, 36 in Chile, 32 in the United States, and 11 in the European Union – and those numbers are rising fast. 

The rates are relatively lower in Asia and the Pacific, but these countries already largely contained the virus without mass vaccination programs, and their economies have since experienced a rapid recovery. 

Meanwhile, lower-income countries on several continents are falling behind, pointing to the need for a more ambitious international effort to provide them with vaccines. As many have noted recently, in our interconnected world, no one is safe until everyone is safe.

Assuming that vaccination continues to pick up globally, the most likely scenario for the economy is a rapid recovery in the second half of this year and into 2022. We should see a partial but sharp reversal of the K-shaped growth patterns that have emerged in pandemic-hit economies.

Specifically, growth in highflying digital and digitally enabled sectors will subside, but not dramatically, because the forced adoption of their services will be tempered by the resumption of in-person activities. At the same time, the sectors that were partly or completely shut down will revive. 

Major service sectors like retail, hospitality, entertainment, sports, and travel will reopen for an eager public. Industries such as cruise lines will probably institute their own version of a vaccination certificate, with sales rebounding once customers are confident about safety.

All told, this return to previously closed consumption patterns, turbocharged by pent-up demand, will produce a burst of growth in depressed sectors, leading to improved economic performance overall.

Unemployment will almost certainly fall, even if permanent changes in living and work patterns reduce employment in some areas. (For example, hybrid work models that lock in pandemic-era remote workplaces may reduce demand for restaurants in city centers.)

To be sure, while massive government programs have buffered the economic shock of the pandemic, hard-hit sectors have nonetheless faced significant losses. Between these transitory reductions on the supply side and the predictable surge in demand, a temporary bout of inflation is possible and perhaps likely. But that is no cause for great concern.

Financial markets are already anticipating these trends. After struggling before the pandemic and being hammered in the early stages of the contraction, many value stocks are staging a comeback. 

Growth stocks in the digital sector, meanwhile, have experienced a small correction. 

But this, too, should be temporary. While value stocks will continue to hover above their previous doldrums, digital growth stocks will benefit from the powerful long-term trend toward incremental value creation via intangible assets.

One matter of considerable importance is international travel. Businesses can function on digital platforms for a while, but eventually in-person contact will become essential. 

Moreover, many economies are heavily dependent on travel and especially tourism, which accounts for 10-11% of GDP in Spain and Italy and as much as 18% of GDP in Greece (and probably more if one counts multipliers).

Compared to many other sectors, travel faces additional headwinds, because it is non-local. The rapid recovery pattern that local service industries can expect once the virus is under control does not strictly apply to travel, especially at the international level. 

To allow for more travel between countries, both – origin and destination – will need to have made progress in vaccinating their populations and containing the virus. Those who are vaccinated and willing to travel will have to be acceptable to the destination country, perhaps by presenting some kind of certification or vaccine passport.

Complicating matters further, international travel is subject to multi-jurisdictional and somewhat uncoordinated regulation. This, together with imperfect cross-border knowledge about external conditions, will make adjusting to new realities on the ground more difficult.

The current trajectory of vaccination indicates that the global rollout will take considerably longer than the programs in advanced economies. The hope is that once these first movers are done, their leaders will turn their attention to bolstering international cooperation and accelerating vaccine production and deployment in developing countries and some emerging markets.

By that point, the advanced economies will be experiencing a brisk recovery, like China and the other Asian economies that contained the virus early on. The return of high-employment service sectors will fuel a broad-based comeback, producing market shifts in relative value across sectors. Schools will resume full in-person learning, armed with complementary digital tools that may enhance the curriculum and provide resilience for the next shock.

In the second half of 2021 and into 2022, the K-shaped dynamic of the pandemic economy will give way to a multi-speed recovery, with the traditional high-contact sectors taking the lead. 

The two lingering areas of uncertainty for health and economic outcomes are the pace of the vaccine rollout in the developing world and international cooperation to accelerate the restoration of cross-border travel. But with forward-looking leadership, both issues should be fully manageable.

Michael Spence, a Nobel laureate in economics, is Professor of Economics Emeritus and a former dean of the Graduate School of Business at Stanford University. He is Senior Fellow at the Hoover Institution, serves on the Academic Committee at Luohan Academy, and co-chairs the Advisory Board of the Asia Global Institute. He was chairman of the independent Commission on Growth and Development, an international body that from 2006-10 analyzed opportunities for global economic growth, and is the author of The Next Convergence: The Future of Economic Growth in a Multispeed World.