Aurelia Butler

Good morning. Absolute hog of a rally in stocks yesterday, with big techs Google and Amazon leading the way. No particular reason for it, but as discussed below, the market may be set up for a short-term pop. Feeling bullish? Email us: [email protected] and [email protected] bounce? Investors dream of catching the moment of capitulation — that brief period when sentiment is so washed out, portfolio positioning is so bearish and so much bad news is baked into prices that a whisper of good news, or even less-bad news, will make risk assets jump. Alas, stock exchanges do not make an announcement on capitulation day, and no set of indicators sends an unambiguous signal that things have become as bad as they can get. The latest edition of Bank of America’s much-followed institutional investor survey seems to suggest that we are getting a little closer, though. The survey authors note a “dire level of investor pessimism” that suggests stocks and credit could rally. Here is their chart of the net percentage of investors expecting a strong economy (that is, the per cent expecting a strong economy less the per cent expecting a weaker economy) and the net per cent who are overweight equities:

Growth optimism is at an all-time low and equity positioning is the thinnest since 2008. Unsurprisingly, given recent signals from the bond market, the deep pessimism does not reflect expectations of runaway inflation, but rather that the Federal Reserve will increase short-term rates, halting inflation at a cost to growth:

The survey also shows that a strong majority of investors do not expect long-term rates to rise. Same story: the Fed wins the war, but growth is a casualty. As a result, cash holdings in portfolios are high, risk exposure is low and defensive stocks are in vogue. The asset class investors are most bullish on is cash, and the US dollar in particular. Without being quite as emphatic about it as the BofA team, this does all look a little capitulation-y. On the retail investor side, though, the picture isn’t quite as one-sided. The AAII investor sentiment survey shows that bears are still in control, but bulls have bounced back some in recent weeks:Maybe, just maybe, the climb up from the bottom has begun (I must admit that chart does give me an animal desire to buy stocks, but I’m suppressing it for now). Whatever their feelings, though, retail investors are still putting money to work in the stock market. Here, from VandaTrack, is a chart of net retail inflows into US stocks. They are volatile, but are positive and are tracking about where they have been tracking all-year long:

Desire for risk exposure is still there: Cathie Wood’s temple of profitless tech, Ark Innovation fund, has been pulling in cash all year. Another indication that investors have not quite quit on risk is provided by Marty Fridson of Lehmann Livian Fridson Advisors. He notes that high-yield corporate bond valuations are not particularly beaten down by the standard of past cycles. He points to the distress ratio, or the proportion of bonds that are trading at a yield spread over Treasuries of 1,000 basis points or more. The proportion of bonds trading that wide stood at 10.27 per cent as of last week. Here is what previous cyclical lows have looked like:

We’re just not there yet, in short. And indeed, the point might be generalised to other asset classes. We have had a massive move in interest rates — the 10-year yield is up one and a half percentage points this year. That alone has taken a big bite out of asset valuations. So, for example, much of the terrible returns from high-yield bonds has nothing to do with their risk spreads, but just with the move in Treasuries. The pricing of risk — spread-widening, that is — looks to have some room to run if a recession is on the way. Hence the historically moderate distress ratio. Something similar may be true of equities. Their implied discount rate has risen — but do investors’ expectations for the next few years of cash flows reflect recession yet? All that said, the fact remains that sentiment is awful, and moments of awful sentiment are generally not bad times to buy. The BofA strategy team (which remains very bearish long-term) outlines the following contrarian trade for the third quarter:Risk-on if no Lehman [ie, no major market participant blows up], CPI down, Fed pause by Xmas . . . short cash-long stocks, short US$-long eurozone, short defensives-long stocks banks & consumer.Could such a trade work? Two related factors seem to be particularly important to its success. Oil prices will have to fall (likely because of better than expected developments in the Russia-Ukraine war) or inflation will continue to make trouble. And financial conditions will have to loosen, either because the Fed eases up a bit or for some other reason. On that last point, watch the dollar, the great global tightening agent. It has eased up in the past day or two against the euro:That’s a cheerful chart! A short-term bounce wouldn’t be at all surprising here. But the bigger picture still looks pretty grim, and not fully priced in. One good read It may not be possible for China to have a banking crisis. The financial system is something of a closed loop and the government are epic can-kickers. But here, Minxin Pei makes the case that it could happen: “If local officials have to hire thugs to attack bank customers trying to get their money back, investors should brace for far worse days ahead for China’s banking sector.” More

Australia has launched a review of its central bank after the institution was criticised for delaying interest rate rises even as inflation took hold, prompting its own governor to describe its forecasting as “embarrassing”. The review could result in the first significant reshaping of the Reserve Bank of Australia’s functions and purpose since the 1990s, when banking supervision was stripped out into a new body. Australia’s treasurer Jim Chalmers said the review would consider the performance of the central bank, its board composition and its inflation targeting strategy. “We face a complex and changing economic environment, and now is the right time to ensure we’ve got the world’s best, the most effective central bank,” Chalmers told Australia’s public broadcaster ABC on Wednesday. The review was announced after the RBA was blasted by some economists for keeping the cash rate — the metric used to define interest rates — at a historic low of 0.1 per cent as the economy roared out of the Covid-19 downturn. The RBA was forced to announce a small rate rise in May during the country’s election campaign — seven months after New Zealand’s central bank acted — and as inflation hit 5 per cent. It has subsequently raised the rate twice to 1.35 per cent after abandoning the dovish stance it maintained well into 2022. The bank is expected to introduce more rate rises in the coming months. Philip Lowe, RBA governor, admitted in May that the central bank’s forecasting had been “embarrassing” given it had indicated that it would keep rates as low as possible until 2024. Analysts said that guidance helped to prolong a housing boom, with Australians taking on high levels of debt as inflation rose. “We should forecast this better. We didn’t,” he said. The independence of the RBA and its inflation target have been credited with ushering in Australia’s strong economic performance before the coronavirus pandemic caused the country’s first recession in 30 years. The review will consider how the RBA reacts during times of crisis when monetary policy moves are limited.

Lowe welcomed the government’s review of the central bank on Wednesday, adding that it was possible to return inflation to the target range of 2 per cent to 3 per cent while keeping the economy on an “even keel”. Belinda Allen, senior economist at Commonwealth Bank, said: “Unlike other central banks where a recession is required to bring inflation down, the RBA remains committed to lifting interest rates but still allowing for [moderate] economic growth and low unemployment.”Australia’s unemployment rate hit a near-50-year low of 3.5 per cent in June.The review will be conducted by Carolyn Wilkins, an external member of the Bank of England’s financial policy committee and a former senior deputy governor of the Bank of Canada, alongside Renee Fry-McKibbin, an economics professor at the Australian National University and former civil servant Gordon de Brouwer. More

More than a thousand miles from Wall Street, Thomas Mantz, president of a Florida food relief organisation called Feeding Tampa Bay, sees US consumers struggling to cope with rising prices for life’s necessities.Mantz said “food insecurity” is growing once again in his 10-county region of west-central Florida after falling from its coronavirus pandemic peak. Relying on donations of food and cash, his group is serving about 1.65mn free meals a week, compared with 1.25mn before Covid-19, mainly to members of working families.“Over the last five to six months, with the inflation spike, we are seeing more and more folks accessing our services,” he said. “We regularly see people who have two or three jobs.”The lines forming for free food in places like Florida are complicating the debate raging over the direction of the US economy as the Federal Reserve lifts interest rates in the hopes of taming inflation without pushing the country into recession.Hopes have grown for a softer landing in recent days as second-quarter bank earnings reports and government data releases suggested US consumers are bending but not breaking under the weight of rising interest rates and higher prices for food, petrol and shelter.Retail sales jumped 1 per cent in June, while a University of Michigan study found that households’ inflation expectations for five years from now have fallen to 2.8 per cent from a previous reading of 3.1 per cent. But the signs of resilience are being taken with a grain of salt, even on Wall Street, reflecting the evident strain among lower-income Americans and expectations that rising prices will eventually eat away at the finances of growing numbers of consumers.One red flag is that Americans are putting away less of what they earn than they have in recent years. The personal savings rate fell below 6 per cent this year for the first time since 2013, according to the Department of Commerce.Big banks like JPMorgan Chase, Citigroup and Wells Fargo braced for turbulence by collectively increasing their loan loss reserves by more than $1bn last quarter. In a sign of emerging distress, 30- and 60-day delinquencies involving the lowest-rated borrowers in auto asset-backed securities have climbed above the levels at the start of the pandemic, according to Morgan Stanley research.Bill Demchak, chief executive of PNC, a US lender with $544bn in assets, told investment analysts that he thought “the trouble ahead lies somewhere in the middle of next year, not any time in the next six months”.“The Fed has to slow the economy to a pace to get inflation under control and I think that’s going to be harder to do than the market currently assumes and I think it’s going to take longer than the market currently assumes,” he said. “When that happens, we’re going to see credit costs go up, at least back to what we could call normalised levels.”

The Fed’s most recent Beige Book, published last week, found that consumer demand had started to moderate as higher food and petrol prices ate into discretionary income. The mood soured in the regions around Boston, Philadelphia and Chicago, with concerns about an impending slowdown mounting. Near Cleveland, Richmond and Dallas, business activity has begun to ebb.Adjusted for inflation, food spending fell 5.5 per cent between January and May, the largest four-month drop since 1973, according to an analysis of Bureau of Economic Analysis data by economist Omair Sharif, founder and president of Inflation Insights in Pasadena, California.“The declines are widespread, with consumers buying less of nearly everything,” he said. “It wasn’t a mix-shift in the categories. That’s pretty surprising.”Rick Cardenas, chief executive of Darden Restaurants, said last month that “lower-end” diners at Cheddar’s Scratch Kitchen, a chain where the average bill is $15 per person, were coming less often and showing signs of “cheque management” — altering their orders to keep the bill low.Discount retailers such as Ollie’s Bargain Outlet have also noted the strain among their low-income core consumers. “That individual is already in a pretty heavy pressure point to where they’re either trading out or they’re reducing their visits significantly, and they’re looking for necessities at this point,” chief executive John Swygert told analysts last month, predicting that “middle income” shoppers would be next to feel more stress as rising petrol and grocery prices deplete their savings.By contrast, demand for goods and services targeting better off Americans remains robust. Executives from Burberry to Kroger have hailed the continued appetite for costlier items from leather bags to premium-priced Murray’s Cheese. After PepsiCo pushed prices up by 12 per cent in its latest quarter to cover its rising costs, chief financial officer Hugh Johnston told the Financial Times that, so far, “there hasn’t been much reaction from the consumer . . . Our volumes were still up.”Fed policymakers — and Wall Street bankers — draw confidence, too, from the state of the job market. The pace of job creation has defied expectations — with 372,000 position created in June, helping to keep the unemployment rate steady at 3.6 per cent.In recent earnings releases, JPMorgan and Bank of America, the two biggest US banks by assets, reported that consumers using credit and debit cards increased their spending by 15 per cent and 10 per cent, respectively, during the second quarter.The consumer is in “great shape”, said Jamie Dimon, JPMorgan chief executive. “Even if we go into a recession, they’re entering that recession with less leverage, in far better shape than . . . in ‘08 and ‘09, and far better shape than they did even in 2020. And jobs are plentiful.”The exceptions to that rule are seeking help from groups such as Feeding Tampa Bay. Mantz said many of his clients come from families scraping by on low wages without access to bank accounts, credit cards or other financial products that can help consumers weather crises.

There are millions of such people in the US. In a report last year, Federal Deposit Insurance Corporation estimated there were 7.1mn “unbanked” households at the start of the pandemic, about 5.4 per cent of the total, and predicted that the number had probably grown. Unbanked rates are highest in minority communities — 13.8 per cent in African-American households and 12.2 per cent in Latino households.Mantz said many of the people he sees depleted their financial resources during the pandemic and “don’t have anything to fall back on”. Whether the US tips into recession or not, he suspects their travails are not likely to end soon.“We have seen over the years that the folks we serve recover last,” he said. “They are typically impacted sooner because prices rise or availability become tighter, but it also takes longer to recover because they don’t have the resources that you or I might.” More

The writer is founder of Dezernat Zukunft, a macrofinance think-tankAs the European Central Bank prepares to launch a critical new tool to tackle the threat of fragmentation of the eurozone’s financial markets, governments still seem to be sitting on the sidelines.That is a mistake. It is pushing the central bank into murky political territory, risking its credibility and may result in another lost decade marked by under-investment, stagnation and growing economic divergence between member states.The ECB’s bond-buying mechanism to be outlined on Thursday aims to address the gap between the yields on German and other government bonds in the eurozone. Such spreads can cause an uneven transmission of monetary policy.Assume for instance that the ECB raises rates by 0.25 percentage points and that this causes the spreads between German and Italian government bonds to increase from 1.5 to 2 points. Since government bonds act as benchmarks for credit pricing, high spreads would lead to a tighter monetary policy stance for Italian borrowers. With spreads unaddressed, conducting monetary policy would lead to inflationary outcomes in Germany and deflationary ones in Italy. This is undesirable from a monetary policy perspective and works against convergence in the eurozone.Now switch perspective to fiscal policy. For fiscal policy, ECB bond purchases have two effects: one is secure access to credit for the respective governments and, two, a lower than otherwise cost of borrowing. The latter has a direct impact on compliance with European fiscal rules: lower interest payments mean more space under the 3 per cent deficit limit.The current institutional set-up thus muddies the waters: to pursue its mandate, the ECB must address spreads. But addressing spreads has fiscal consequences. In particular, in addressing spreads, the ECB effectively decides which member states benefit from the privilege of sovereign borrowing, under what conditions and at which price. That is a deeply political issue, on which a technocratic, non-elected body is ill-suited to pronounce.The ECB can only make choices within this ambiguous architecture; and while some are worse than others, none are good. Governments on the other hand could unmuddy things — and should. It is they who are currently deferring deeply political issues around sovereign debt to the ECB. It is they who should decide which country has sound government finances with a collective judgment.Where member state governments decide a country runs sound fiscal policy, the ECB could pursue its mandate without stepping into fiscal territory. Where they decide it has not, it is clear who made that judgment and why, and who is accountable for its consequences.In this case, spreads could only be addressed through the Outright Monetary Transactions programme that was launched during the 2012 debt crisis. This involves the ECB buying a country’s sovereign debt in the secondary markets — as long as that country has agreed to a rescue package from the European Stability Mechanism and tough reform requirements.Addressing spreads is in governments’ self-interest: the higher spreads are, the more difficult it will be to marry the goal of reducing debt ratios with sustaining high levels of investment. Rising interest payments leave less money for public investment. Increasing financing costs reduce the number of profitable private investments. Hence governments should have no interest in maintaining spreads — except as disciplining devices addressing specific misbehaviour, a function they could still serve if the use of the fragmentation tool were conditional on sound government finances.A criterion that governments could use to assess fiscal policy could be the primary balance — the difference between the amount of revenue a government collects and the amount it spends excluding financing costs. By definition, the primary balance is not influenced by monetary policy. Thus, a country could, for instance, get its peers’ stamp of approval if it runs a primary balance likely leading to debt reduction.Governments have been keen to emphasise the flexibility of the Stability and Growth Pact as an asset. Flexibility is supposed to ensure that countries are not tied up in an overly restrictive corset of fiscal rules unfit for their respective circumstances. That sounds good in theory. Yet, in practice, strategic ambiguity on the side of fiscal policymakers implies that the ECB is left with political choices — ones it did not have to take if governments played their proper part. More

Covid, the Ukraine war and the aftermath of Brexit are continuing to disrupt the aerospace industry’s supply of people, as well as parts.Staffing shortages have caused airports such as London’s Heathrow to cancel thousands of flights, while aircraft manufacturers are experiencing longer lead times on their production lines. Last month, reports from the US suggested Boeing would be struggling to meet its target of manufacturing 31 737 Max single-aisle jets a month because suppliers are not delivering key parts on schedule. Aerospace supply chains have become more fragile due to greater globalisation, increased complexity, as well as price inflation amid the Russia-Ukraine war, says Dave Food, head of supply chain at business intelligence software maker Board International.“Macroeconomic events have put the defence and aerospace sectors under increased pressure following a post-pandemic awakening,” he adds. “The economic unrest has instigated a wave of new challenges, with sanctions and conflict restricting the flow of critical resources. Concerns about the titanium supply chain are also being raised by the conflict between Russia and Ukraine, with major raw materials, metal, and alloy producers serving customers across the globe situated on both sides of the border.”Defence companies will probably experience a more changed market than commercial aircraft manufacturers as a result of Russia’s invasion of Ukraine and more military spending, globally, Food says. “The conflict has prompted many Nato members to increase their defence budgets, which is likely to increase expenditures on spare parts and maintenance services for a short while, and on larger defence equipment in the future.”

Food believes the key to “keeping the supply chain afloat” for aerospace groups is having greater visibility of supply chain constraints, investing more in research and development, allocating workforce and technology resources adequately, and fostering industry collaboration.However, as demand for commercial, civil and defence aviation recovers, the difficulty for companies is returning employee headcount to pre-pandemic levels and possessing all the fundamental skills, says Warrick Matthews, chief procurement officer at Rolls-Royce Civil Aerospace.“In some markets, we have suppliers who, when they held careers days 3-4 years ago, would have had a queue going around the block, but now they are really struggling to find people,” he says. “They cut pretty hard to get through the pandemic and anticipated that, when the growth came back, they would just rehire. They now face some real challenges where there has been a change of attitude in the workforce, such as not wanting to work in the industry or not wanting to work on shifts, for example.”Rolls-Royce Civil Aerospace has responded to these challenges by bolstering partnerships with high-performing suppliers. “It’s not a coincidence that we have awarded £3.2bn of long-term agreements to that group in the last two years,” says Matthews. “This is a strategic decision that helps us minimise our exposure to key technologies and build a more resilient, sustainable supply chain.”Consolidation can be “a double-edged sword”, though, suggests Steven Wood, senior commercial manager at UK innovation centre Digital Catapult — as it can simplify the aerospace supply chain but decrease its diversification. “Having only two or three major suppliers can make them complacent and slow and it stifles innovation,” he says. “Increasing the number of companies to include non-traditional defence suppliers — which are often smaller, disruptive and more agile — introduces much needed new ideas, responsiveness and adaptability, and this can act as an example for incumbents to adopt.”A diverse supply chain can also help aerospace companies close skill gaps. Wood says: “Large defence suppliers find it hard to attract and retain people with advanced digital skills — small innovators simply do not. The same effect occurs with technology. Companies tend to invest in technologies that they understand, so a diverse supply chain allows for a range of technological options.” One way established aerospace companies can improve access to the latest technologies is by collaborating with innovative start-ups. Nichola Bates, head of global accelerators and innovation programs at Boeing and managing partner at investment programme Aerospace Xelerated, says that as innovation comes through collaboration, “start-ups are a big part of this as the technologies that they are currently developing are crucial to our industry’s future”.Aerospace Xelerated has invested in a dozen start-ups — including Circulor — attempting to solve some of the industry’s biggest challenges. Circulor’s blockchain technology lets companies track materials in transit, something that could be immensely useful for aerospace and defence companies dealing with supply chain shortages.Bates adds: “Our cohorts have already raised more than £100mn in additional funding and created close to 200 jobs across the UK and internationally.”For all the initiatives taken by aerospace and defence companies, though, supply chain disruption is unlikely to end in the foreseeable future. David Lavery, director at research and analyst firm ISG, warns it could last another two years and potentially worsen as “demand outstrips the ability to supply in a way we’ve never seen before”. More

When China’s ruling Communist Party released its 14th five-year plan in 2021, chief among its aims was “self-reliance in science and technology as a strategic underpinning for national development”.But a year later, experts say the continued wait for delivery of the single-aisle C919, China’s first passenger jet, is a reminder that the country’s civil aviation industry is “decades” behind the west and remains heavily dependent on western suppliers.“The jury is still out on whether China can develop an internationally recognised and successful aerospace industry,” says Sash Tusa, aerospace and defence analyst at research firm Agency Partners.The C919 was due at the end of last year. No date for delivery has been set though in May the first test flight of an aircraft that is set to be delivered was completed. The jet is being developed by the Commercial Aircraft Corporation of China (Comac), a state-backed group spun out from China’s military.China is set to become the world’s largest market for air travel and has 248 operational airports, according to the Centre for Aviation.It is now one of the two most important markets for the two global aviation giants Boeing and Airbus. Boeing forecasts that one in every five commercial aeroplanes ordered between 2021 and 2040 will be for customers in China.At the start of this month, Airbus announced a deal with four Chinese airlines for 292 single-aisle A320 aircraft, which carry a ticket value of $37bn. But according to Jim Harris, who leads the aerospace and defence practice at Bain & Company, Comac will end the Boeing-Airbus duopoly in China for large commercial aircraft before 2040.“The Chinese government is willing to invest tens of billions of dollars to achieve this strategic outcome, and China provides a large captive domestic market in which Beijing can mandate orders for Comac even if the C919 is less competitive than western alternatives,” he says.Analysts estimate that development of the C919 has been backed by between $50bn and $72bn in state-related support, compared with the $22bn that the World Trade Organization says Airbus received for the A320 and other models.Comac has so far received 815 orders from 28 parties for Rmb500bn ($74bn) according to its website, almost all believed to be from Chinese domestic airlines such as China Eastern Airlines and Shenzhen Airlines.

The group aims to control one-third of the Chinese domestic market for large aircraft by 2035. An Airbus report from 2018 forecast that the Chinese domestic market would need 7,400 additional aircraft by 2037.For the global market, however, industry insiders say that the 168-seat C919 is not as competitive as it is less fuel efficient than Boeing and Airbus jets and will struggle to attract international buyers away from the two groups.Airbus says that while it expects “some part” of China’s domestic demand to be met by C919s, internationally Comac lacks the infrastructure and investment to be a threat to the Airbus-Boeing duopoly.For it to achieve wider market success Comac would need “an international sales organisation as well as an established customer support network. Indeed, it took Airbus some 40 years to achieve parity with the US manufacturers,” says the company.The C919 also shows how far China is from developing a fully native aviation supply chain, leaving it exposed to geopolitical risk. It relies on western companies to produce its most complex parts, including the engine, which is the product of a joint venture between America’s GE and France’s Safran.This means that even though the plane, and many of its parts, are manufactured by Chinese assembly lines, the company depends on intellectual property and aftersales services from western companies.Tusa says Beijing has had an instructive lesson on what would happen if relations with the west soured, from witnessing the sanctions that crippled Russia’s aviation industry by withdrawing the western expertise and supplies of spare parts.“To take a C919 and turn it into a Chinese-only aircraft would require redesign, testing of every single certificate, most important of which is the engines. I’ll see you in the late 2030s,” he says.Comac has already been squeezed by US-China tensions. It was put on a Trump administration watchlist in 2021 over its alleged military links, although the Biden administration removed it months later.Geopolitical tensions around China are also a concern for western suppliers. Harris from Bain warns they “will need to walk a fine line between capturing growth opportunities in the China market versus enabling a future competitor”. More

In all the talk of “building back better” and making economies “match fit”, “strategically autonomous” and “resilient”, there is an unstated but tragic premise. For decades, most advanced economies did not build their future but languished in an investment drought, the scandal of which is greater for being unacknowledged.Between 1970 and 1989, the share of gross domestic product devoted to investment by six of the world’s seven biggest economies averaged from 22.6 per cent for the US to 24.8 per cent for Germany. The seventh, Japan, was an outlier with 35 per cent. Of the G7, only Canada has sustained this level of investment: its 22.5 per cent in this millennium is barely down from 22.8 back then. All the others have only managed to match their 1970-89 investment levels in four instances: the US in the boom years of 2000 and 2005-06, and France in 2021.Yet these past 20 years have been the era of lower-than-ever financing costs, first because of market exuberance, then thanks to central banks’ ultra-lax monetary policy. And what do we have to show for all that cheap credit? Two lost decades for investment. As economics writer Annie Lowrey concisely puts it, “we blew it”.France and the US have invested nearly two percentage points of GDP less this century than they did in the 1970s and 1980s; Germany and Italy about 4.5 points less; the UK and Japan 6 and 10 percentage points less respectively. These are enormous numbers. The G7 account for about $45tn in annual GDP. Restoring their investment ratios could fill nearly half the global shortfall to the $4tn the International Energy Agency calls for in annual clean technology investment if we are to meet net zero by 2050.Those are total investment numbers, but a similar story holds for the public sector on its own. In the US, net government investment (after accounting for depreciation of the existing public capital stock) fell by almost two-thirds in the decade to 2014, when it dropped to 0.5 per cent of GDP. In the eurozone, net public investment went negative in the same year, thanks to extreme fiscal austerity in the eurozone periphery and chronic under-investment in Germany. Some will be tempted by claims that we need not worry. It is normal to invest less as you get richer — so one argument goes — because adding to an already large capital stock is increasingly useless. The cost of capital goods has fallen, so the same money buys you more real investment, goes another. A third is that the current economy needs intangible, not physical capital, and while this is harder to measure, countries seem to be doing better on that front. Yet such reassurances, even if factually true, are no use. No one who takes a close look at most western countries’ physical infrastructure can think it fit for purpose — not when that purpose expands to include decarbonising our industries and energy and transport systems.Why have we lived for so long off past investments and failed to make enough new ones? Financing costs have clearly not been the problem, with interest rates at record lows. (Crisis-hit eurozone countries in the sovereign debt crisis were the exception, but even Spain and Italy have out-invested Britain for decades.)More likely culprits are a lack of demand and cheap labour. Businesses that don’t expect enough demand to absorb expanded output have no reason to invest. And when they are permitted to treat workers as cheap and disposable, they may choose that over irreversible capital investments. This is why faster wage growth and the so-called “labour shortages” (really competition for workers) are something we should embrace if we are to prod businesses into productive investments. Something similar may have been true for cheap energy in Europe. The 2010s were a time of unusually low-cost natural gas and hence electricity. This may have undermined the urgency of investing in both greater renewable generation and geopolitically safe natural gas developments. Oil prices, too, were low for much of the decade.But underneath these economic factors, I think our failure to invest is profoundly political. Raising the investment-to-GDP ratio, whether through boosts to private or public investment, or both, means that a smaller ratio of GDP is left over for consumption. Even if this prepares a better future, it can feel like a measlier existence today. And that is something a generation of politicians across the rich world have been afraid to inflict on their voters. That is true in good times, when transfer payments, tax cuts and immediate public goods are all politically more attractive than capital investment. (Something equivalent is at work in the private sector: witness companies’ choice to return cash to owners through share buybacks rather than invest in their own growth.) It has also been true in bad times, when investment is the easiest expenditure for belt-tightening governments and companies to cut.European countries have come to rue how they used the “peace dividend” of 1989 to cut defence spending. The same moment pushed the west as a whole to forget the broader idea of short-term sacrifice for a more prosperous future. But this is not inevitable, as exceptions such as Canada and the Nordics’ sustained investment show. Western voters and governments have both unlearned the virtue of delayed gratification. They have to relearn it, and [email protected] More

ROME (Reuters) – Italian Prime Minister Mario Draghi will address the upper house Senate on Wednesday on a political crisis that could bring down his government and trigger early elections at a time of international tumult and economic upset.Draghi tendered his resignation last week after the populist 5-Star Movement refused to back his broad coalition in a parliamentary confidence vote.President Sergio Mattarella rejected the resignation and instead asked him to address parliament, hoping he would find a solution allowing him to stay in office until the end of the legislature in early 2023.Senators have been summoned for 9.30 a.m. (0730 GMT) and the result of a vote on the prime minister’s speech was expected by 7.30 p.m. (1730 GMT). A debate on the government’s future is also expected to take place at the lower house on Thursday.Little seems to have changed on the political front since last week, when the 5-Star boycotted the confidence vote on measures aimed at alleviating the high cost of living, complaining that its own concerns had been overlooked.It is still unclear whether Draghi remains determined to quit at some stage in the next two days, or if he might change his mind and stay in office, as many people both inside and out Italy have urged, fearing his departure could trigger chaos. The former European Central Bank chief has enough backing to remain in office without 5-Star, but he has so far rejected that option because his original mandate was to lead a national unity coalition with parties from across the political spectrum.5-Star leader Giuseppe Conte said at the weekend he wanted Draghi to signal that he was ready to enact some of his policy priorities before renewing his support to the government, including introducing a minimum wage scheme.Complicating efforts to overcome the divisions, the rightist League party and its Forza Italia allies have said they do not want to share power with 5-Star anymore.The 5-Star has held repeated meetings in recent days to try to decide its strategy, but remains deeply divided. Two party lawmakers told Reuters that as of Tuesday evening they had not received any indication on how to vote in Wednesday’s debate.If Draghi believes his government cannot be revived, he would hand in his resignation once more to President Mattarella, almost certainly opening the way for elections in late September or early October.Italy has not had an autumn election since World War Two as that is the period normally reserved for drawing up the budget.Credit rating agency Fitch said on Monday that Draghi’s resignation would make structural reforms and fiscal consolidation ever more challenging in Italy, which has the second highest debt-to-GDP ratio in Europe after Greece. More