Ubiquity, Complexity, and Sandpiles

By John Mauldin

“How did you go bankrupt?” 
“Two ways. Gradually, then suddenly.”

―Ernest Hemingway, The Sun Also Rises

Change happens quickly and, often, unpredictably. 

And as we will see, the unpredictable part is actually a mathematical principle. 

As in the Hemingway quote above, not just bankruptcy but change also happens slowly and then, seemingly, all at once. 

It’s time passing without change that causes the worst problems, including some historic economic catastrophes. 

It turns out we shouldn’t just accept change; we actually need it.

Last week, I said we would skip this letter since I’m fishing with friends at Camp Kotok. 

But over the weekend, I realized it would be a perfect opportunity to repeat part of a letter I originally wrote in 2006 and have referred to several times. 

It is the single most-read letter I have written and the most commented-on, too. 

I consider it, in some ways, my most important letter. 

You should read it again if you’ve read it before. 

I have updated it a little bit, but the principles are timeless.

I’ll be quoting from a very important book by Mark Buchanan called Ubiquity, Why Catastrophes Happen

I HIGHLY recommend it if you, like me, are trying to understand the complexity of the markets. 

The book isn’t directly about investing—although he touches on it—it’s about chaos theory, complexity theory, and critical states. 

It is written so any layman can understand—no equations, just easy-to-grasp, well-written stories and analogies.

Here’s that story with some new comments and thoughts afterward.

Ubiquity, Complexity Theory, and Sandpiles

As kids, we all had the fun of going to the beach and playing in the sand. 

Remember taking your plastic bucket and making sandpiles? 

Slowly pouring the sand into ever bigger piles until one side of the pile starts to collapse?

Imagine, Buchanan says, dropping one grain of sand after another onto a table. 

A pile soon develops. 

Eventually, just one grain starts an avalanche. 

Most of the time, it’s a small one. 

But sometimes, it builds up, and it seems like one whole side of the pile slides down to the bottom.

Well, in 1987, three physicists named Per Bak, Chao Tang, and Kurt Wiesenfeld began to play the sandpile game in their lab at Brookhaven National Laboratory in New York. 

Actually, piling up one grain of sand at a time is a slow process, so they wrote a computer program to do it. 

Not as much fun, but a whole lot faster. 

Not that they really cared about sandpiles; they were more interested in what are called “nonequilibrium systems.”

They learned some interesting things. 

What is the typical size of an avalanche? 

After a huge number of tests with millions of grains of sand, they found out there is no typical number:

Some involved a single grain; others, ten, a hundred, or a thousand. 

Still others were pile-wide cataclysms involving millions that brought nearly the whole mountain down. 

At any time, literally anything, it seemed, might be just about to occur.

The pile was indeed completely chaotic in its unpredictability. 

Now, let’s read this next paragraph slowly. 

It is important as it creates a mental image that helps clarify the organization of the financial markets and the world economy.

To find out why [such unpredictability] should show up in their sandpile game, Bak and colleagues next played a trick with their computer. 

Imagine peering down on the pile from above and coloring it in according to its steepness. 

Where it is relatively flat and stable, color it green; where steep and, in avalanche terms, “ready to go,” color it red. 

What do you see? 

They found that at the outset, the pile looked mostly green, but that, as the pile grew, the green became infiltrated with ever more red. 

With more grains, the scattering of red danger spots grew until a dense skeleton of instability ran through the pile. 

Here then was a clue to its peculiar behavior: a grain falling on a red spot can, by domino-like action, cause sliding at other nearby red spots.

If the red network was sparse, and all trouble spots were well isolated one from the other, then a single grain could have only limited repercussions. 

But when the red spots come to riddle the pile, the consequences of the next grain become fiendishly unpredictable. 

It might trigger only a few tumblings, or it might instead set off a cataclysmic chain reaction involving millions. 

The sandpile seemed to have configured itself into a hypersensitive and peculiarly unstable condition in which the next falling grain could trigger a response of any size whatsoever. 

Something only a math nerd could love? 

Scientists refer to this as a critical state. 

The term critical state can mean the point at which liquid water would change to ice or steam or the moment that critical mass induces a nuclear reaction, etc. 

It is the point at which something triggers a change in the basic nature or character of the object or group. 

Thus (and very casually, for all you physicists), we refer to something being in a critical state (or use the term critical mass) when there are the conditions for significant change.

But to physicists, [the critical state] has always been seen as a kind of theoretical freak and sideshow, a devilishly unstable and unusual condition that arises only under the most exceptional circumstances [in highly controlled experiments]... . 

In the sandpile game, however, a critical state seemed to arise naturally through the mindless sprinkling of grains.

Thus, they asked themselves, could this phenomenon show up elsewhere? 

In the earth’s crust, triggering earthquakes, in wholesale changes in an ecosystem, or in a stock market crash? 

“Could the special organization of the critical state explain why the world at large seems so susceptible to unpredictable upheavals?” Buchanan asks.

Buchanan concludes in his opening chapter:

There are many subtleties and twists in the story... but the basic message, roughly speaking, is simple: The peculiar and exceptionally unstable organization of the critical state does indeed seem to be ubiquitous in our world. Researchers in the past few years have found its mathematical fingerprints in the workings of all the upheavals I’ve mentioned so far [earthquakes, eco-disasters, market crashes], as well as in the spreading of epidemics, the flaring of traffic jams, the patterns by which instructions trickle down from managers to workers in the office, and in many other things.

At the heart of our story, then, lies the discovery that networks of things of all kinds—atoms, molecules, species, people, and even ideas—have a marked tendency to organize themselves along similar lines. On the basis of this insight, scientists are finally beginning to fathom what lies behind tumultuous events of all sorts, and to see patterns at work where they have never seen them before.

Fingers of Instability

So, what happens in our game?

[A]fter the pile evolves into a critical state, many grains rest just on the verge of tumbling, and these grains link up into “fingers of instability” of all possible lengths. 

While many are short, others slice through the pile from one end to the other. 

So, the chain reaction triggered by a single grain might lead to an avalanche of any size whatsoever, depending on whether that grain fell on a short, intermediate, or long finger of instability.

Now we come to a critical point in our discussion of the critical state. 

Read this next excerpt with the markets in mind (and this is critical to our understanding of markets and change. 

Maybe you should read it two or three times.):

In this simplified setting of the sandpile, the power law also points to something else: the surprising conclusion that even the greatest of events have no special or exceptional causes. 

After all, every avalanche large or small starts out the same way, when a single grain falls and makes the pile just slightly too steep at one point.

What makes one avalanche much larger than another has nothing to do with its original cause, and nothing to do with some special situation in the pile just before it starts. 

Rather, it has to do with the perpetually unstable organization of the critical state, which makes it always possible for the next grain to trigger an avalanche of any size. 

Now, let’s couple this idea with a few other concepts. 

First, economist Dr. Hyman Minsky showed how stability leads to instability. 

The more comfortable we get with a given condition or trend, the longer it will persist, and then the more dramatic the correction when the trend fails.

The problem with long-term macroeconomic stability is that it tends to produce unstable financial arrangements. 

If we believe that tomorrow and next year will be the same as last week and last year, we are more willing to add debt or postpone savings in favor of current consumption. 

Thus, says Minsky, the longer the period of stability, the higher the potential risk for even greater instability when market participants must change their behavior.

Relating this to our sandpile, the longer a critical state builds up in an economy—or in other words, the more fingers of instability that are allowed to develop a connection to other fingers of instability—the greater the potential for a serious avalanche.

A second related concept is from game theory. The Nash equilibrium (named after John Nash, subject of the Oscar-winning movie A Beautiful Mind) is a kind of optimal strategy for games involving two or more players, whereby the players reach an outcome to mutual advantage. 

If a game has a set of strategies with the property that no player can benefit by changing his strategy while the other players keep their strategies unchanged, then that set of strategies and the corresponding payoffs constitute a Nash equilibrium.

A Stable Disequilibrium

So, we end up in a critical state of what Paul McCulley calls a “stable disequilibrium.” 

We have players all over the world tied inextricably together in a vast dance through equities, debt, derivatives, trade, globalization, international business, and finance. 

Each player works hard to maximize their personal outcome and reduce their exposure to fingers of instability.

But the longer the game runs, says Minsky, the more likely it is to end in a violent avalanche, as the fingers of instability have more time to build, and, eventually, the state of stable disequilibrium goes critical.

Go back to 1997. 

Thailand began to experience trouble. 

The debt explosion in Asia began to unravel. 

Russia was defaulting on its bonds. (Astounding. Was it less than 25 years ago? 

Now Russia is awash in capital. 

Who could have anticipated such a dramatic turn of events?) 

Things on the periphery, small fingers of instability, began to impinge on fault lines in the major world economies.

Something that had not been seen before happened. 

The historically sound and mathematically logical relationship between 29- and 30-year bonds broke down. 

Then country after country suddenly and inexplicably saw that relationship in their bonds begin to correlate, an unheard-of event. 

A diversified pool of debt was suddenly no longer diversified. 

The fingers of instability reached into Long Term Capital Management and nearly brought the financial world to its knees.

And now, different fingers of instability are creating an even worse crisis in the credit markets.

Sandpiles 2021

All right, back to the present. 

When I originally wrote that letter, it was 2006, and the fingers of instability hadn’t yet created the Great Recession. 

You could certainly see red dots in the sandpile, most notably subprime debt, but there were literally hundreds of dots scattered throughout the world economy, most of them innocuous until they weren’t. 

And then the scramble for liquidity began, except the liquidity wasn’t there, and, well, you know the rest of the story.

This should be even more concerning if you think about my recent series on what I think is a major policy mistake being made by the Federal Reserve and central banks worldwide. 

We are adding sand to not just one inevitably collapsing sandpile, but dozens and maybe hundreds of them. 

They won’t keep growing forever.

Which particular sandpile will fall first? 

It could be many, but it will likely be debt-oriented. 

And the fingers of instability tell us that it doesn’t matter which grain of sand is the trigger, just that there will be one. 

Millions of investors think they can continue acting as if today will just be like yesterday, which will be like tomorrow, and then be able to sell when trouble appears.

They’re partly right. 

They will be able to sell… but well below the prices they expect.

I write often about the connectedness of so many global markets and how the debt crisis, unfunded pension liabilities, and government promises all over the world seemingly keep mounting, yet markets go up more.

I think the mother of all Minsky moments is building. 

It will not be an instant sandpile collapse but instead, take years because we have $500 trillion of debt to work through. 

Remember, that debt just can’t be swept away. 

It is both money somebody owes and an asset on somebody else’s balance sheet. 

If you are retired, your pension and healthcare benefits are part of your net worth. 

They are assets on your balance sheet that you count on to cover future spending. 

We can’t just take that away without huge consequences to culture and society.

But the fingers of instability, the total credit system, are seemingly growing with more red sand dots every month. 

All are inextricably linked. 

One day, another Thailand or Russia or something else (it makes no difference which) will start a cascade.

Remember, very astute people saw the subprime crisis and made a lot of money shorting that market. 

I saw it coming but didn’t know how to trade it. 

I guarantee you, I’m paying attention now to who can profit from the next credit crisis. 

Maybe I’ll succeed, and maybe I won’t, but just once, I would like to be on the right side of a crisis.

No More Business Cycles

One last comment that I picked up over the years. 

My friend Peter Boockvar actually crystallized this thought, but I think I’m going to make it part of my own liturgy: We no longer have business cycles; we have credit cycles. 

Central banks and governments, not to mention investment banks and investors, are all using credit in formerly unbelievable ways, and I am here to shout that the world is becoming one massive finger of instability.

Let’s go back to that 1987 mathematical experiment. 

The simple fact is there are green sand dots all over the world. 

They represent stability in the global system, which is allowing the fingers of instability to build up in a potentially deadlier way than we have ever seen before.

While we have had to deal with a virus-triggered recession, we are thankfully watching the economy begin to grow again. 

It is happening in ways that will make the world look different in 2022 than it did in 2019.

We take comfort from the stability we see around us. 

Corporate profits are up. 

We are greeted every day with some amazing new technological innovation that changes everything in some industry. 

Living standards keep rising.

And yet, Minsky tells us stability breeds instability. 

That sandpile experiment, as simple as it seems now, shows that the longer the stability lasts, with the fingers of instability connecting in hidden and unknown ways, the greater the avalanche will be.

I suggest you read at least the first half of Nassim Nicholas Taleb’s book, Antifragile. 

Here are three lessons that will show you what it means to be antifragile:

  1. Fragile items break under stress; antifragile items get better from it.
  1. In order for a system to be antifragile, most of its parts must be fragile.
  1. Antifragile systems work because they build extra capacity when put under stress.

This is a great way to explain the sandpile game in economic terms. 

Economic sandpiles that have many small avalanches never have large fingers of stability and massive avalanches. 

The more small, economically unpleasant events you allow, the fewer large and, eventually, massive fingers of instability will build up.

Efforts by regulators and central bankers to prevent small losses actually create the large fingers of instability that bring down whole systems and spark global recessions. 

And, increasingly, the unfunded liability of government promises will be the most massively unstable finger.

In that crisis, things that should be totally unrelated will suddenly become intertwined. 

The correlations of formerly unrelated asset classes will all go to one at the absolute worst time. 

Panic and losses will follow. 

Governments will try to stem the tide, perhaps appropriately so, but, eventually, the markets have to clear.

There is a surprising but critically powerful thought in that computer model from 35 years ago: We cannot accurately predict when the avalanche will happen. 

You can miss out on all sorts of opportunities because you see lots of fingers of instability and ignore the base of stability. 

And then you can lose it all at once because you ignored the fingers of instability.

You need your portfolios to both participate and protect

Don’t blindly buy index funds and assume they will recover as they did in the past. 

This next avalanche is going to change the nature of recoveries as other market forces and new technologies change what makes an investment succeed.

I cannot stress that enough. 

Don’t get caught in a buy-and-hold, traditional 60/40 portfolio. 

Don’t walk away from it. 

Run away.

Cautious optimism is always the long-term winner. 


But a buy-and-hold portfolio in today’s world is neither cautious nor optimistic. 

Hope is not a strategy. 

That’s precisely what a buy-and-hold portfolio is.

And with that, I will hit the send button, and as you read this, hopefully, my son Trey and I will find the bass hitting our lines. 

The food will be great and the conversation some of the best anywhere. 

You have a great week!

Your in a bit of a philosophical mood analyst,

John Mauldin
Co-Founder, Mauldin Economics


As moratoriums lift, will America face a wave of foreclosures and evictions?

In Miami as elsewhere, a house-price boom and a housing crisis could happen at the same time

Miami is hot—especially if you are selling a home. 

House prices are 20% higher than a year ago. 

And unlike other big American cities, rents are up too (by 24% year-on-year), as the Magic City soaks up newly untethered teleworkers. 

Ecstatic estate agents describe a bonanza. 

Sellers are waiving inspections and appraisals entirely, buying units sight unseen, and aggressively bidding up prices. 

One agent tells of a client bidding $50,000 above the appraised value of a home—and still getting rejected. 

Another admits sheepishly to recently buying a house of her own without an inspection. 

All the usual gaudy accoutrements of the city are here: the ostentatious sports cars, the well-trafficked designer stores, the planes circling Miami Beach advertising a prominent rapper playing at a nightclub.

Yet amid this exuberance, almost 8% of mortgage-holders in Miami are delinquent, among the highest share in the nation. 

Meanwhile, people renting housing face the end of a federal moratorium on evictions at the end of the month. 

A moratorium on mortgage foreclosures ends at the same time, raising fears of a spike in houses lost amid a house-price boom.

Surveys conducted by the Census Bureau do indeed show worrying signs. 

One in four renters and one in ten mortgage-holders have little to no confidence in their ability to pay for housing in the next month (see chart 1). 

Some 2.8m households, containing 7.4m Americans, are behind with the rent. 

The same surveys show that 1.9m households, in which 6m Americans live, are behind on their mortgages. 

Black and Hispanic households, those that are poor, and those with children are at greatest risk of losing housing.

No nationwide freezing of evictions and foreclosures has ever been attempted before. 

Unwinding the policy is therefore unprecedented. 

The degree of upheaval may ultimately depend on state and local decisions, which are tremendously varied.

Miami offers a compelling case study. 

Since it had no strict evictions moratorium of its own, a good number of people lost their homes, despite the moratorium declared by the Centres for Disease Control and Prevention (cdc) to slow the spread of covid-19. 

“The cdc actually has a lot of holes,” says Jeffrey Hearne, a legal-aid lawyer in Miami. 

“The biggest hole is that it does not clearly apply to a landlord who is evicting for no reason at all.” 

While the cdc order prohibited evictions for failure to pay rent, landlords were able to evict for other reasons, such as simple termination of an expired lease.

And they did. 

A study of 63 cities and counties by the Government Accountability Office found that those with local moratoriums saw evictions remain at one-tenth of their usual pace; those without quickly surged to 80% of normal volumes (see chart 2). 

Since January, there have been 920 eviction cases filed in Miami each month—all while the federal moratorium was in place. 

This suggests that the eventual number of pent-up evictions may be smaller than feared.

The increase may also be tamped down by other means. 

Congress has allocated $46bn in rental-assistance funds, aimed at keeping tenants in place without leaving landlords to swallow the cost. 

Some cities, like Miami, have been swift to disburse funds. 

Other cities and states have not. 

A Treasury Department report from May 31st found that less than 4% of funds had actually been distributed. 

The state of California, where applications could take as long as three hours to fill out, has spent $73m of the $1.4bn it was given. 

Ingrid Ellen of New York University explains the administrative complexity in this way: over 400 separate programmes had to be set up across the country, with platforms for verification and payment that could cope with both hard-to-reach tenants and landlords.

If renters have been evicted despite the federal moratorium, the picture for foreclosures is different. 

Two federal policies have prevented them. 

First, the cdc moratorium, which expires soon. 

Second, the cares Act, which provided homeowners with 180 days’ worth of forbearance on their mortgage payments. 

This has been extended twice since, by 180 days each time. 

Many mortgage providers also voluntarily suspended starting foreclosures.

2008 it ain’t

These policies have been highly effective. 

Lenders repossessed around 7,000 properties in the first quarter of 2021, 87% fewer than in the same period in 2020, even though the share of mortgage debtors that were behind on their payments spiked to a high not seen since the global financial crisis (see chart 3). 

By contrast, evictions in some cities are just 20% shy of their pre-pandemic averages, according to researchers at the Eviction Lab. 

Owners, in other words, have received much more protection than renters.

Data from the Mortgage Bankers Association, a lobbying group, find that 4.3% of borrowers are more than 90 days behind, or “seriously delinquent”. 

In normal times, they would be facing imminent foreclosure. 

That is about three times the level before the pandemic, says Frank Nothaft of CoreLogic, a property-analytics firm. 

Most of those people, he adds, are being protected by government programmes.

If foreclosures have been more effectively bottled-up than evictions, it is natural to suspect that they will surge more rapidly. 

The most worrying analogy is with the global financial crisis of 2008-10, during which 3.8m households lost their homes in the span of three years. 

But a post-moratorium foreclosure crisis, happening while house prices are soaring and the labour market is tight, would look very different.

Many borrowers might try to stay put by requesting a loan modification. 

Yet this is not a simple path. 

Modification requires reams of paperwork, and cases can drag on in Jarndycean fashion. 

Banks can modify loans at their discretion, though regulation sometimes makes this hard. 

Default rates on modified mortgages have historically been high so banks must hold extra capital against them, something they are loth to do. 

The other incentive is pecuniary. 

Unlike in 2008, any properties that banks seize are likely to be sold at a profit, not a loss. 

“The banks were bad when they didn’t want the homes,” says Ricardo Corona, a Miami mortgage lawyer. 

“Imagine what they’ll be like when they do!”

Daryl Jones, also a mortgage lawyer in Miami, expects three waves of foreclosures. 

First, a spike when the moratorium lifts for those who were mired in foreclosure when the pandemic began. 

Next, a “smooth increase” between August 2021 and February 2022 as forbearance rolls off. 

Last, a spike in March 2022 as last-chance forbearances expire. 

In 2010, the worst year on record, there were 66,000 foreclosures in Miami-Dade County. 

There are between 5,000 and 10,000 in a typical year. 

Mr Jones anticipates between 30,000 and 40,000 in the year from September 2021.

Each statistic is the aggregate of many glum stories.

One is Keith Simpson’s. 

Mr Simpson ran a construction company until the financial crisis. 

He requested a change to the terms of his loan in 2011 after falling behind on payments for the home in Miami that he and his wife bought in 1998. 

After two years of paperwork and progress, his wife was given too much opioid medication while in hospital in 2013—an accident that left her disabled. 

Since she was unable to work, Mr Simpson had to resubmit his application for modified terms. 

Instead, the bank decided to foreclose.

His first legal appeal was successful. 

Then it was overturned by Florida’s third district court of appeals, which sided with the bank. 

The couple were served a notice to leave and moved into rented accommodation in 2018—20 years after purchasing their home. 

“We were just completely wiped out,” says Mr Simpson. 

“I am 65 years old and I am starting all over again from scratch.” 

He looks at the situation many homeowners face now and worries the same fate will befall them, too.  

How blockchain is shaking Swift and the global payments system

A crucial linchpin of the world’s financial plumbing is ripe for disruption

Gillian Tett

© Efi Chalikopoulou

Last month, the Brussels-based utility called the Society for Worldwide Interbank Financial Telecommunication (Swift) announced that six global banks had embraced its plan to upgrade cross-border payment systems.

So far, so boring, many might think. 

Payment processes rarely grab public or political attention, unless they go wrong. 

In that sense they are like household plumbing.

But investors should wake up. 

For this joint initiative (together with the Bank of China, Citi, Bank of New York Mellon, Deutsche, Standard Chartered and BNP Paribas) is one sign of a potentially vicious battle now erupting due to the rise of cryptocurrencies and the technology behind them.

The wider public tends to view digital tokens, such as bitcoin, primarily in terms of whether they can act as a store of value and medium of exchange. 

Many politicians are simultaneously caught up in the emerging debate around the potential of central bank digital currencies.

But what is equally important — and often overlooked — in all of these conversations is what blockchain and the cryptocurrencies it supports could do to financial plumbing, not just inside countries but between them. 

This could reshape not just finance, but US geopolitical leverage as well.

Swift is currently both a crucial linchpin of global finance and a peculiarity which seems ripe for disruption. 

It first sprang to life back in 1977, when American and European banks created a jointly-owned utility to perform correspondent banking services. (As an admirably lucid new book, The Pay Off, explains, this occurred because Citi was developing a proprietary payments network, and its rivals hated the idea of a monopoly sitting in private hands.)

Today Swift remains a non-profit co-operative, with 11,000 members and facilitating payments worth an eye-popping $1.5tn a day. 

It does this not by actually moving money, but by enabling banks to dispatch messages that credit or debit their accounts as payments occur.

This makes it akin to an electronic post system. 

Swift officials, however, prefer to dub it the world’s large “fintech”. 

Maybe so. 

But its Achilles heel is that it is anything but “swift”. 

On the contrary, The Pay Off notes that until recently Swift’s payments were slow, its costs high and the utility slow to embrace innovation because it had a bureaucratic culture and weak governance structure.

Unsurprisingly, this has prompted fintech upstarts, such as Ripple and Facebook’s Diem project, to create plans to challenge Swift with innovations such as distributed ledger technology (“blockchain”). 

Some of Swift’s own members are also challenging it. 

JPMorgan, for example, is developing a particularly bold blockchain initiative system called Onyx with a messaging system called Liink. 

This is already moving “billions each day’, according to officials.

Meanwhile, the Russian and Chinese governments are reportedly creating rival platforms, since countries subject to US sanctions, such as Iran, have occasionally been excluded from the network. 

(Gottfried Leibbrandt, the former Swift head and co-author of The Pay Off, recently explained to an FT forum that while the utility is technically independent, Washington has sanction power because half of Swift’s payment flows are in dollars.)

Will these challenges topple Swift? 

Definitely not in the short term. 

Even if Russia and China build rival systems, it is unlikely others would choose to rely on these in a world where the overwhelming majority of global trade is currently invoiced in dollars. 

And while fintech start-ups are performing small-value, cross-border retail payments — and aim to dominate specific niches — none have any scale, yet. 

Moreover, the key thing to understand about platforms such as the ambitious JPMorgan Onyx/Liink system is that they are “closed loop”, as opposed to Swift’s open system. 

Rivals thus have an incentive to collaborate with Swift to promote interoperability. Fintech is a world of frenemies.

But even if short-term challenges can be fended off, the long term is uncertain. 

It is very unlikely that the US Treasury would choose to let Swift be disintermediated, given its geopolitical significance. 

Washington and Wall Street thus have a joint incentive to help the utility fend off competition, by following others’ innovations.

And Swift is trying to do precisely that. 

Four years ago it introduced one big upgrade: a new “global payments innovation” to improve processes. 

The recent announcement in partnership with the banks is supposed to deliver more digital capabilities in November 2022.

A 15-month plan, however, looks achingly slow to anyone in Silicon Valley — or in Beijing, which is racing ahead with its digital currency. Swift’s ambitions also seem modest compared to the promise of blockchain.

So the issue being fought over in Brussels is not just one of technical and geopolitical importance — must cross-border payments occur via messages? 

Should America weaponise dollar flows? — but also commercially critical. 

Can an incumbent monopoly ever effectively steal from disrupters?

The fact that the answers are uncertain is unnerving. 

And more important than the hype around cryptocurrencies. 

Coronavirus and the global recovery: the dangers of whiplash economics

Ten days ago, markets were spooked by inflation. But the spread of the Delta variant is now forcing countries to reverse plans to reopen

Delphine Strauss in London 

© FT montage; AFP/Getty Images | Central bankers Christine Lagarde and Jay Powell are trying to balance boosting recovery and taming inflation

Much of Australia is back in a pandemic lockdown. 

Tokyo opened the Olympics on Friday under a state of emergency. 

The Netherlands has had to reimpose restrictions on cafés, bars and nightlife. 

New travel warnings have hit Spain’s hopes of a revival in tourism, and Italians will soon have to show a health pass if they want to see a film or swim, after prime minister Mario Draghi followed France’s lead and took steps to prod people into seeking vaccination.

The unwelcome return of restrictions has planted a new fear in the minds of investors: that the rapid spread of the coronavirus Delta variant could bring the global recovery to a juddering halt.

Just 10 days ago, markets were fixated on the risks of overheating economies stoking a surge in inflation — piling pressure on policymakers to consider an early withdrawal of pandemic-era stimulus measures. 

This week began with a sharp sell-off in global equities as fears grew over the spread of the Delta variant. 

By midweek, stock prices had bounced back — but US Treasury yields remained at rock bottom levels, suggesting creeping doubts about the strength of the global recovery.

So swift has been the turnround that anyone following the twists in global markets over the past fortnight could well be suffering from whiplash.

“As the Delta variant has picked up, the narrative seems to have changed from ‘look at how inflation is rising!’ to ‘look at how growth is slowing!’,” wrote Ajay Rajadhyaksha, analyst at Barclays. 

Meanwhile Alan Ruskin, chief international strategist at Deutsche Bank, says the episode has shown the resilience of investor demand for risky assets — but has also put paid to a previous “gangbuster view of the world opening up in synchronised fashion”.

ECB president Christine Lagarde says the central bank will be more tolerant of inflation before raising rates © Sanziana Perju/EPA

The spike in coronavirus cases linked to the more infectious strain of the virus has brought public health concerns back to the fore just as it seemed the end of the pandemic might be in sight for some countries — with governments around the world forced to pause or reverse reopening plans.

“It’s a risk that we are putting more and more emphasis on,” says Gregory Daco, chief economist at the consultancy Oxford Economics, who warns of the potential for it to lead to an uneven global recovery, “with some economies going potentially back down into an environment of tighter social restrictions and social distancing measures”.

That anxiety was reflected by Christine Lagarde, president of the European Central Bank, on Thursday.

She said the Delta variant was “a growing source of uncertainty” as she set out a new pledge by the central bank to be more tolerant of inflation before raising interest rates.

The UK has shown that even with a high vaccination rate, and a political decision to tolerate higher rates of infection, there is no easy way to avoid economic disruption once the Delta variant has taken hold. 

Although social distancing rules ended on Monday, hundreds of thousands of workers have had to stay home to self-isolate after coming into contact with someone who tested positive — leaving the government scrambling to avert public service shutdowns and empty shelves in supermarkets.

Yet despite the growing risk posed by the Delta variant to the global outlook, policymakers and economists believe its impact is more likely to dampen rather than derail the recovery in major economies, where vaccination programmes have weakened the link between infection and hospitalisation.

Last week the Fed’s chair Jay Powell fielded several questions on inflation as fears of rising prices remain dominant in the US © Charlie Bibby/FT

Jennifer McKeown, at the consultancy Capital Economics, says there are some signs of people becoming more cautious about going out in the UK, with the upward trend in trips for shopping, leisure and work — encouraged by the progressive lifting of restrictions — stalling as people try to avoid being forced to self-isolate just as the holiday season starts

Survey evidence also points to shortages of staff and materials starting to weigh on business activity. 

But even in the UK, consumers are still spending and businesses are still scrambling to hire.

In the eurozone, business activity grew at its fastest rate for 21 years in July as many countries continued to lift Covid-19 restrictions. 

The spread of new cases has barely dented consumer confidence.

Lagarde said business surveys and hard data confirmed the ECB’s June forecasts, which assumed some lockdown measures would continue to the end of the year. 

“The eurozone recovery is on track,” she wrote on Twitter, “but we are not yet out of the crisis.”

US inflation focus

In the US, fears of overheating and excessive inflation remain dominant. 

During two days of congressional hearings last week, Jay Powell, the chair of the Federal Reserve, fielded far more questions from lawmakers on the central bank’s management and assessment of rising prices than on the economic impact of the Delta variant.

A passer-by walking along Sydney’s Circular Quay. Policymakers in Australia are racing to catch up with their vaccination campaign before the Delta variant overtakes them © AFP via Getty Images

The US has a significant buffer to absorb a new coronavirus-related hit without plunging back into recession. 

Fed officials in June projected that gross domestic product would grow at a pace of 7 per cent this year, with the unemployment rate dropping to 4.5 per cent — after nearing 15 per cent at its pandemic peak — by the end of 2021.

Jason Furman, a professor at Harvard and former economic adviser to Barack Obama, says that while it is right to be nervous about the Delta variant, it should not change the macroeconomic trajectory. 

This, he argues, is because those who are at most risk of infection in the US — the people who have chosen not to be vaccinated — are also the least likely to change their behaviour. 

And that the states most in need of new social distancing rules “are the low vaccination states that are least likely to implement those rules”.

Yet, even in the buoyant US economy, where wage pressures are increasingly evident, Delta’s rise could make Fed rate-setters more cautious about an early exit from stimulus.

If the coronavirus situation were to deteriorate further in the coming months, it would pose a big dilemma for US policymakers, because they have been pivoting towards removing fiscal and monetary stimulus, rather than preserving it or even boosting it.

Some Fed officials have warned that the central bank needs to be attuned to the danger of an economic setback caused by new coronavirus outbreaks.

“I think one of the biggest risks to our global growth going forward is that we prematurely declare victory on Covid,” Mary Daly, the president of the Federal Reserve Bank of San Francisco, told the Financial Times in early July.

But Daco says: “The appetite for strong fiscal buffers or strong monetary policy buffers is much less than it was a year ago. So that begs the question of how resilient the US economy is without the fiscal support, without the monetary support.”

A supermarket in South London. Hundreds of thousands of workers in the UK have had to stay home to self-isolate leaving the government scrambling to avert public service shutdowns and empty shelves in supermarkets © Justin Tallis/AFP/Getty 

Powerful headwinds

The rise of the Delta variant is also complicating the policy debate in other countries. 

In the UK, the recent strength of inflation has taken the Bank of England by surprise, leading some rate-setters to hint that they might vote for an early end to quantitative easing. 

But others on the monetary policy committee have taken a more nuanced view — including Jonathan Haskel, an external member, who said this week that a return to tight policy was “not right” for now, because the economy faced two headwinds — “the highly transmissible Delta variant and a tightening of the fiscal stance”.

In the eurozone, despite the rapidly improving outlook, there is no immediate pressure to tighten policy. 

The ECB’s projections show inflation still falling short of its new, more ambitious target of 2 per cent by the end of 2023.

In contrast with the gyrations elsewhere, Asia has seen relatively little volatility in the economic outlook, even as the Delta variant has taken hold in some countries. 

A relatively slow start to vaccination, combined with smaller fiscal stimulus packages, meant there was no comparable moment when a booming recovery and overheating seemed possible.

Despite talk of a new global inflationary era the Bank of Japan, for instance, will not reach its 2 per cent inflation objective in the foreseeable future, so interest rates will not rise. 

Indeed, the outlook for a Japanese recovery has dimmed as Covid-19 cases rise, giving rise to talk of a fresh round of fiscal stimulus.

A vaccination centre in South Africa. The most vulnerable to the spread of the Delta variant are emerging economies in Asia and Africa © Alet Pretorius/AP

Economists are also far less sanguine about the outlook for other advanced economies where vaccination campaigns have lagged — Australia and New Zealand among them — and policymakers are now racing to catch up before the Delta variant overtakes them.

China’s zero tolerance policy for coronavirus infections allowed its economic recovery to begin well before the US, but it now creates big hurdles to a full reopening — because the authorities impose travel restrictions or shut down neighbourhoods whenever new cases break out. 

“That takes a toll on consumption since it’s practically difficult for China to keep virus cases at zero,” says Larry Hu, an economist at Macquarie Group.

Although second-quarter growth outpaced most economists’ expectations, Beijing warned of an “unbalanced” recovery and of the risks stemming from Covid-19 variants. 

Analysts point to other drags on growth, including the global chip shortage; rising domestic credit risks; a drop in state-backed infrastructure investment and the US administration’s ban on investment in Chinese technology.

By far the most vulnerable to the spread of Delta, however, are emerging economies in Asia and Africa, where death rates are rising to their highest level since the start of the pandemic and policymakers have limited ability either to impose new lockdowns or to support growth.

Gita Gopinath, the IMF’s chief economist, last week highlighted the “dangerous divergence” between advanced economies and many emerging and developing countries, which had limited access to vaccines, rapidly dwindling fiscal support and were already facing a rapid rise in interest rates forced by talk of US Federal Reserve tapering.

China’s zero tolerance policy for Covid-19 infections allowed its economic recovery to begin well before the US, but it now creates big hurdles to a full reopening © Nicolas Asfouri/AFP/Getty Images

Catherine Mann, who has just stepped down as Citi’s chief economist to join the BoE’s MPC, argues that the divergent fortunes of advanced economies — and the even starker divisions among emerging ones — make the global recovery far more fragile than headline forecasts might suggest.

“Many people are looking at global growth rates right now of 6 per cent and thinking, ‘This is fabulous’,” she said in evidence to a UK parliamentary committee this week. 

But that growth rate was already set to slow dramatically next year, she added — and was now increasingly reliant on a sustained US recovery, and vulnerable to upsets in emerging markets.

“In understanding the challenges and the risks associated with Covid, we had all thought that we were closer to the light at the end of the tunnel,” she told MPs. 

“But these additional mutations have really generated some [global] concern . . . It does imply lower growth for emerging markets. [And they] are a very big chunk of the global economy.”

Additional reporting by James Politi in Washington, Robin Harding in Tokyo, Sun Yu in Beijing and Edward White in Seoul.


Chris Vermeullen

Consumers, and consumer activity, should always be one of the top economic indicators traders/investors follow.  

Additionally, the Transportation Index is another key indicator that leads the US/Global markets by 3 to 6+ months in most cases.  

Consumers and consumer activity make up nearly 70% of the US GDP and account for a very large portion of the US/Global economy.  

If consumers constrict spending and economic engagement activity over the next few months because of new COVID restrictions, perceptions that the economy has become super-heated, and/or any other issues related to US/World affairs, it is likely that the shifting Dampening Sine Wave process may see an accelerated Amplitude range related to the normal Dampening process compounded by the shifting Consumer sentiment.

Currently, the Michigan Consumer Sentiment data has collapsed -13.55% based on the August 13, 2021 posting – from a level of 81.2 to 70.2.  

This comes after Consumer Sentiment has been above 71 since January 2012.  

This new low data point for Consumer Sentiment may represent a big shift in how consumers are reacting to the global market trends and the US Federal Reserve pushing the envelope related to interest rates and economic activities.

If we stop to consider how important the consumer is and the psychological aspects of a shifting economy as we have described above, one must stop and ask two simple questions –  “what happened the last time consumers pulled away from economic activities and how long did it take them to re-engage in normal spending activities?”. 

The answer to that question is that this type of consumer reaction has only happened once in the past 10 years, based on data sourced from Investing.com using the Michigan Consumer Sentiment data.  

April 9, 2020 (-20.31%) and April 24, 2020 (-19.42%) – right at the peak of the COVID-19 global shutdown crisis.

Prior to those dates, we have to go all the way back to 2010 & 2011, just after the Housing Market crash where the markets were struggling to regain upward momentum, and the Consumer Sentiment levels bottomed out at 56.2.

In Part II of this research article, we’ll continue to explore the shifting tides of the US and global markets in relation to our belief that the Dampening Sine Wave process is continuing to unfold.  

This means traders and investors need to be prepared for extreme volatility events over the next 12 to 24+ months and be ever cautious of any new external economic crisis events.  

These external events may prompt an increase in the Amplitude and structure of the Dampening Sine wave process and could completely disrupt the global market recovery process taking place right now.

More than ever, right now, traders need to move away from risk functions and start using common sense.  

There will still be endless opportunities for profits from these extended price rotations, but the volatility and leverage factors will increase risk levels for traders that are not prepared or don’t have solid strategies.  

Don’t let yourself get caught in these next cycle phases unprepared.