Aurelia Butler

Switzerland’s central bank on Thursday raised interest rates for the first time in 15 years, as it became the latest rate-setter to shift away from ultra-loose monetary policy. The Swiss National Bank said its benchmark rate would rise by 50 basis points from minus 0.75 per cent to minus 0.25 per cent, catching markets off guard. The Swiss franc surged following the surprise decision, gaining 1.7 per cent to trade at 1.02 to the euro, the strongest level in nearly two months.The move came just hours after the US Federal Reserve announced it would raise rates by 75 basis points, but ahead of a likely rise in rates from the European Central Bank in July. As a big exporter, Switzerland closely watches the exchange rate with the euro and has, in the past, waited to follow a lead from Frankfurt. But expectations that inflation will remain uncomfortably high in the coming quarters led the central bank to go first. “The tighter monetary policy is aimed at preventing inflation from spreading more broadly to goods and services in Switzerland. It cannot be ruled out that further increases in the SNB policy rate will be necessary in the foreseeable future,” the bank said in a short statement.Inflation hit 2.9 per cent in Switzerland in May, its highest level in about 14 years. The central bank also removed a reference to a “highly valued” franc in its statement, indicating it is backing away from a longstanding policy of trying to curb the currency’s strength. “If we take the SNB by its word, it now seems as if it would like currency strength, to take the sting out of imported price inflation,” said Melanie Debono of Pantheon Macroeconomics.The SNB’s shift is the first indication its governors are taking the rising global commodity prices seriously enough to consider reining in their expansive monetary policy. The central bank has aggressively used its balance sheet to try and anchor the entire Swiss economy over the past decade. Switzerland’s status as a haven economy has meant the SNB has had to battle to suppress serious and sustained upward pressure on the currency over the past decade and a half of international crises and low rates elsewhere in the developed world. The franc’s strength was hindering the competitiveness of the country’s exports. The SNB said it would continue to monitor the rising value of the franc, and was still prepared to conduct controversial interventions in the foreign exchange market.

Thanks to quantitative easing, the money from which the SNB invests abroad to depress the franc, the SNB now holds assets worth more than SFr1.056tn ($1.076tn), equivalent to just over 140 per cent of Switzerland’s entire annual gross domestic product, and making the bank’s portfolio even larger than the sovereign wealth funds of many petrostates. The bank said the overall economic outlook for Switzerland remained positive. It forecasts low unemployment and a 2.5 per cent rise in GDP this year. The war in Ukraine has had “comparatively little adverse impact”, it said, other than in creating supply bottlenecks in a limited number of markets.The global outlook was volatile, the bank said, but it believes inflation will be curbed in the medium term by rising interest rates around the world. More

Veteran Free Lunch readers will know how much I wrote in this space about the Brexit negotiations, especially about the challenges over Northern Ireland. Once Brexit was done and dusted, I hoped never to write about that again. But again and again, it turns out Brexit is never done and dusted for this UK government. It has now introduced a bill to breach the Northern Ireland protocol part of the treaty it signed to govern its exit from the EU. (See Anton Spisak’s Twitter thread for a useful and quick overview of what the bill does.) What to say about this latest Brexit move by Prime Minister Boris Johnson and his colleagues? That it is dishonest, hypocritical, and — depending on what you think it is meant to achieve — likely to be ineffective at best.The dishonesty is clear enough. It is not true, as Johnson has been claiming for some time, that the protocol is working in unexpected ways. Its entire purpose was to put a regulatory and customs border between Great Britain and Northern Ireland in order to avoid one between Northern Ireland and the Republic of Ireland. Indeed, Johnson’s main “victory” in renegotiating the deal agreed by his predecessor was to shift this outcome from a last resort (a “backstop” if other solutions could not be agreed) to a first resort. He also secured agreement that goods entering Northern Ireland which both sides agreed were not at risk of being shipped on to the EU would benefit from any lower import duties the UK might negotiate with trading partners in the future. (His other achievement was to secure that the Northern Ireland assembly had to regularly approve the continuation of the arrangements, a requirement which, ironically enough, the new bill seems to give the UK government the power to remove.)The government is also dishonest in its claim that reneging on international treaty commitments is the only way to achieve the improvements in trade flows across the Irish Sea that it claims to want. Many have pointed out — see David Allen Green’s excellent blog post on this — that rather than breaking a treaty, the UK could have invoked the protocol’s Article 16 which provides for limited departures from its requirements in exceptional circumstances. But there are even less disruptive options within the treaty framework. It set up a whole institutional structure, with a ministerial-level “joint committee” at the top with various specialised committees below it, for bilateral talks to resolve technical issues and figure out implementation problems. The committees can agree to update how the protocol is applied — which we know because they have already done so, as this 2020 joint committee decision shows. Sometimes this will take the form of the EU tweaking its own legislation in response to issues raised by the UK, as was the case with access to UK-approved medicines in Northern Ireland. The EU has offered further such changes.This fact also reveals the government’s hypocrisy. If it really meant to improve conditions on the ground — although Northern Ireland is faring better than most parts of the UK in terms of growth — it would do the hard technical work of finding common positions on practical issues. It would also help reduce frictions in ways compatible with its treaty obligations — it could legally require vendors to supply the whole UK, for example, and provide financial compensation for the administrative burden of the Great Britain-Northern Ireland economic border. Instead, the UK government makes a lot of unhelpful demands on the EU. The idea of a “dual regulation” regime will not do. All it would achieve is to jeopardise Northern Irish businesses’ currently frictionless access to the 500m-strong EU single market. Most of the UK’s other demands are both unrealistic and of primarily ideological, not practical, interest, such as the bid to shrink European courts’ regulatory oversight over Northern Ireland.The one other substantive idea pushed by the UK, however, has merits. The principle of allowing transport into Northern Ireland through “express” or “green” lanes with minimal paperwork for goods that will reliably not enter the EU is now accepted by both sides. That was not always the case when it was proposed in the past, including by Raoul Ruparel, once a No 10 Downing Street adviser on the Brexit negotiations. With the right political directions from the top, and a genuinely constructive attitude from the UK, an agreement is possible. But so far, the UK government is not taking yes for an answer. It is, instead, violating a treaty the prime minister signed, ran an election on, and got through parliament less than three years ago. What will this achieve? For the reasons set out above, it is no way to go about solving practical problems on the ground, so the UK government’s approach will be ineffective in that regard. Whether it is effective in cajoling Northern Ireland’s hardline unionist politicians to rejoin the power-sharing institutions so a functioning regional government can be set up remains to be seen but the signs are not good at the moment. Suppose, instead, that the desired purpose is what the hardest Brexiters clearly want: to end any UK obligation to the EU on anything at all. That would require not just reneging on the Northern Ireland protocol, but on the whole Withdrawal Agreement of which it is a part, and, of course, the bigger Trade and Cooperation Agreement that settled the post-Brexit trade relations between the UK and the bloc. Breaking international law so baldly could trigger a chain of escalation that would end in an outright trade war. That would be devastating but, if economic vandalism is your sort of thing, not ineffective.Most likely, it will not come to that. One view I have heard is that what will happen next will be determined by the timelines of the bill’s passage on the UK side, and the EU’s legal actions on its side. These are both on the order of months. If they culminate at around the same time, the pressure for finding a solution that allows everyone to pull back will come to a head. If experience is any guide, that solution will look very much like what the EU is offering today. That, perhaps, could be sold as the approach being effective in the end — in the sense in which doing the right thing after first trying everything else is effective. Other readablesIt is never fortunate for a central bank to have an emergency meeting, but the European Central Bank may have managed to get back on the front foot on Wednesday. A new report highlights the important role Ukraine could play in the European energy system.The FT’s industry, science and data reporters have come together to create a mesmerising presentation of the growing problems space debris is causing us.Numbers newsThe Federal Reserve raised its policy rate by 0.75 percentage points, the biggest single increase since 1994. My colleagues over at the Unhedged newsletter tell you what they think about it.

Video: Northern Ireland tries to heal a legacy of separation | FT Film More

Famous for its gaucho cattle farmers and love of steaks, Argentina’s appetite for beef is struggling to withstand a jump in prices that has left many cuts 50 per cent higher already this year.In place of mollejas, a veal sweetbread that is a classic of his country’s cuisine, Buenos Aires restaurateur Julián Díaz has started putting other items on the menu. “We’ve turned to lamb and more fish dishes,” said the owner of Los Galgos. Throughout Latin America, many culinary favourites like the Argentine asado barbecue are becoming ever more expensive, as war in Ukraine and global supply chain bottlenecks have a knock-on effect on commodities from fuel to fertilisers.Pensioner Maria Flier said that almost all of her savings now go to groceries. “We used to eat beef all the time, now maybe twice a week at best,” she said at a weekly street market in Argentina’s capital. Although higher inflation is a worldwide phenomenon, for many of the continent’s most disadvantaged even basic foodstuffs have become harder to afford, sparking warnings of nutritional insecurity.

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Hunger in Latin America and the Caribbean (LAC) reached its highest point since the turn of this century, after a 30 per cent increase in the number of people experiencing it between 2019-20, according to a United Nations report in November.Julio Berdegué, representative for LAC at the UN’s Food and Agriculture Organization, said the region had been “going backwards” on food security. About 5 per cent of its population was undernourished in 2014, according to Berdegué, rising to 7.1 per cent in 2017. Due to the Covid-19 pandemic, in 2020 the proportion climbed to 9.1 per cent, almost 60mn people. Fourteen countries in the region have annual food inflation rates above 10 per cent, he added.“It’s been decades since we have seen this, and the combination of both trends is horrific in terms of the human suffering that it is causing,” said Berdegué.While all Latin American economies are self-sufficient in food, according to the consultancy Oxford Economics, even net exporters face inflationary pressures for produce where prices are set internationally, such as grains.The issue is likely to figure in many voters’ minds in presidential elections in Brazil and Colombia, where a former Marxist guerrilla will stand against a populist businessman in a second-round tiebreaker this month. On a recent morning before the first-round ballot in Paloquemao, the largest fruit and vegetable market in Bogotá, punters and vendors alike complained about a range of staples. A standout is potatoes, which have soared in price by three-quarters in 2022. Part of that has been blamed on rising fertiliser prices, as well as protests in Colombia last year that disrupted planting season.Angelica Neira, 30, who runs a vegetable stall with her husband, said that a variety called criollas had doubled to 6,000 pesos ($1.60) a kilo. The small yellow Andean potatoes are used in a traditional Bogotá dish called Ajiaco — a hearty chicken, potato and sweetcorn soup served with capers and avocado.“Tomatoes have also doubled in price,” she added. “Most things have gone up 100 per cent since the start of the year and if not doubled then they’ve gone up maybe 40 or 50 per cent”.A soup kitchen in Buenos Aires, Argentina. Rising food prices have been a particular burden on the region’s poorest residents © Rodrigo Abd/APAnother stall worker, 25 year-old Gerson Ubaque, urged the next government to intervene. “Colombia is a very rich country geographically, because we’re on the equator and we have so many different altitudes. You can grow anything here,” he said.“But rural Colombia needs help — a bit like in Ecuador, where they subsidise agriculture. Here there aren’t any subsidies.”That sentiment will be tested in the run-off between millionaire Rodolfo Hernández and the leftwing former guerrilla Gustavo Petro, who has proposed an agricultural revolution that will turn Colombia into “a pantry for the world”.“Most of our population earns less than 3,000 pesos a day and a litre of milk costs 3,000, and a kilo of meat costs 38,000, so how can people eat?” Petro asked after winning the first-round vote. While some governments have intervened to ease the burden on those struggling the most, mainstream economists argue those policies could backfire. They warn that a splurge of government spending risks damaging the public finances, which in turn could weigh on the exchange rate and add to inflationary forces.Despite high taxes on exports and strict currency and price controls in Argentina, inflation there is approaching 65 per cent, its fastest pace in 30 years. Since October last year the government has frozen prices of over 1,000 household goods in a bid to curb price rises.

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The squeeze on household budgets is poised to be a major theme when Brazil, an agricultural powerhouse, chooses a new president in October. Giovanni Carneiro de Oliveira, who runs two restaurants in central São Paulo, said he had never seen such high price increases for provisions since becoming the owner in 1999. The national dish of feijoada — a bean stew with beef and pork — has not escaped. “The feijoada has become more expensive mostly due to its main ingredient, beans,” he explained. Collard greens, served as an accompaniment, have also climbed from R$30 to R$100 a box.Seasonal factors such as higher temperatures until April and heavy rainfall that has damaged supply are in part to blame for elevated vegetable prices in Brazil, said André Braz, economist at the Fundação Getulio Vargas. While a more favourable climate in winter should help somewhat reverse the situation, he added: “There is another, more permanent effect, which is the increase in production costs: manures, fertilisers, pesticides and also diesel.”Former leftist president Luiz Inácio Lula da Silva is attempting to seize on that discontent to defeat incumbent Jair Bolsonaro, evoking nostalgia for life during his two terms from 2003 until 2010, when living standards rose as Brazil rode the global commodities boom and funded anti-poverty programmes.A butcher in Buenos Aires, Argentina, one of the world’s largest beef exporters © Ronaldo Schemidt/AFP/Getty ImagesElsewhere in the region, politicians are trying other measures. Mexico’s administration last month announced a plan to try to boost the production of staples like corn, rice and beans. Even though the cost of a kilogramme of tortillas — from which many Mexicans get a big chunk of their daily calories — rose by almost one-fifth in the past year, lower prices for beans and rice should help ease the burden on the poorest, according to the head of the country’s anti-poverty agency, José Nabor Cruz.Carlos Vegh, a professor of economics at Johns Hopkins University, pointed out that growth forecasts for the wider region had been lowered in the wake of the Ukraine invasion, and central banks across Latin America are raising interest rates aggressively in an attempt to temper price rises. “Fiscal resources are rather depleted due to the social needs triggered by the pandemic, which does not augur well for help to the poorest in dealing with food price inflation,” he said.Lucinda Elliott in Buenos Aires, Gideon Long in Bogotá, Carolina Ingizza and Michael Pooler in São Paulo and Christine Murray in Mexico City More

Edward Price is a former British economic official and current teacher of political economy at New York University’s Center for Global Affairs.As central banks attempt to tackle this global inflationary spiral we should ask ourselves a very simple question. Worried inflation-targeting central banks now only care about inflation targets, right? Wrong.Look no further than the European Central Bank. Last week, the ECB confirmed its intention to raise interest rates by 25 basis points in July. On the face of things, this is good. In May, consumer inflation in the 19-member euro zone hit a record 8.1 per cent. That is not so good. In fact, that is très mauvais. Bringing this upward price pressure under control is now Christine Lagarde’s number one concern.But it is not her only concern. Check out Martin Arnold’s succinct expression of the ECB’s other fears in the FT: . . . the ECB . . . [is] hoping to regain control of prices without tipping the economy into recession or triggering a bond market panic in the more vulnerable countries of southern Europe.This smells a bit like 2010 doesn’t it? Yesterday, for example, the ECB announced a new “anti-fragmentation instrument”. That probably means more bond buying, which, in turn, would mean anything but an anti-inflation instrument. And earlier this week, M&G Investments’ Eric Lonergan predicted that the second euro crisis has now started. So yes, today’s central bankers fret about inflation – as the Fed’s decision yesterday to lift rates by a whopping 0.75 per cent underscores. But they are also fretting about whether and why their economies are in equilibrium and whether and why their financial systems (and currencies) are sound. The question is how aggressively monetary policy should intervene to dampen prices in the face of supply shocks, the duration of which are unknown. This is tough. How far monetary authorities should allow any economy to adapt to new global circumstances is unclear if, in turn, those new global circumstances are themselves unclear. Perhaps Ukrainian special forces now have more influence on monetary conditions than any central bank.It’s a tricky balancing act. Moreover, an inflation-targeting central bank’s tools are not always pointed at prices anyway. We could say that policy innovations after 2007-8, including the 2020 pandemic response, deviated from strict inflation targeting. For the best example, take quantitative easing (QE), which initially aimed at providing the financial system with ample liquidity and exploded central bank balance sheets the world over. Behold, the total assets of the Federal Reserve System.

At least there is some room for non-inflationary concerns. Today’s policymakers don’t face the inflation problem of the 1980s (see here for Nick Peterson’s take on the Volcker mythos). But, in fighting now-rampant inflation, they will have to worry about the novel side-effects of rate hikes on nervy financial markets and pallid economies. This is, after all, effectively wartime.

The wider point is that central banks make judgment calls. And while inflation may be the main policy concern at the moment, it is far from the only one. Finding the balance between all of them is probably impossible to get exactly right.As central bankers have hinted in recent years, even knowing what exactly to calculate, measure or model is never easy. In 2018, at Jackson Hole, Powell had said this to say about the bread and butter of economics, the natural levels of things like unemployment and interest rates also known as the stars:Navigating by the stars can sound straightforward. Guiding policy by the stars in practice, however, has been quite challenging . . . because our best assessments of the location of the stars have been changing significantly.The Fed chief was hinting at two open secrets. One, whether any given economy is running in an optimal way is, erm, unknown. Two, what policy should do in response to apparently suboptimal outcomes is, erm, also unknown. Even for those of us who warned inflation was going to be a problem (yes, Larry Summers, you win macro), who’s to say that wasn’t just a guess? No one. Now the reality of ex ante macro uncertainties are becoming clear in the reality of ex post inflation.So, spare a thought for the ECB, the Fed and other inflation-targeting central banks. The reality is that they are not only targeting inflation. And they are not doing so because we do not want them to target only inflation. Instead, we have asked them to spare us price pressures while also asking for guaranteed growth. We have asked them to avoid market meltdowns, while also asking for happy currencies. We have, in essence, spent 35 years asking our central bankers for an upside without expecting a down.Perhaps central bankers shouldn’t have listened. But now the bill is due, we shouldn’t also ask them to shoulder all the blame. Price stability is dead. And we killed it – you and I.   More

The already-slim odds of the Federal Reserve bringing down inflation without causing a painful economic downturn took another leg lower on Wednesday as the US central bank embraced what is set to be the most aggressive campaign to tighten monetary policy in decades.After approving the largest interest rate increase since 1994 — bringing the federal funds rate to a new target range of 1.50 per cent to 1.75 per cent — the Fed signalled the policy rate could rise well above 3 per cent by year-end, reaching a level that chair Jay Powell said was expected to be “modestly restrictive” on economic activity. More rate rises are also expected in 2023.The drastic measures reflect a heightened sense of panic that has recently enveloped the Fed as it grapples with the worst inflation in four decades and mounting evidence that the problem could get worse before it improves. At his press conference after the decision, Powell delivered the overarching message that the central bank is “determined” to do what is necessary to address inflation, driving home the message that stifling price pressures are the number one priority even at the cost of slower growth and higher unemployment.“The worst mistake we can make would be to fail, which is not an option,” he said. “We have to restore price stability . . . it is the bedrock of the economy.”Economists have in turn become much more pessimistic about the economic outlook, with several on Wednesday predicting a recession could set in by next year. “The odds of a soft landing are pretty darn close to zero, and the reason is we’re in an unprecedented environment and the Fed’s overwhelming priority is inflation, inflation, inflation,” said Stephen Kane, co-chief investment officer of fixed income at TCW.“Inflation is a lagging indicator [and] the fact they are looking to a lagging indicator for direction as to what to do for current monetary policy that works with a 12-18 month lag, that is almost a guarantee they’ll over-tighten and cause a recession.”Economic projections published by the Fed on Wednesday conveyed what Michael Feroli, chief US economist at JPMorgan, described as “immaculate disinflation” — in other words, that interest rates could rise enough to tame inflation without choking economic growth and causing painful job losses. Fed officials pencilled in core inflation falling 1.60 percentage points between this year and next to 2.7 per cent, with the unemployment rate going from 3.6 per cent currently to 3.9 per cent by 2023 and 4.1 per cent by 2024. Most Fed officials now predict slower growth compared with three months ago, although the economy is still expected to expand 1.7 per cent this year and next. Powell on Wednesday said those projections were aligned with a “softish” landing for the economy, while conceding that the path to do so had become “more challenging”.“What’s becoming more clear is that many factors that we don’t control are going to play a very significant role in deciding whether that’s possible or not,” he said, referring to the commodity price surge stemming from the war in Ukraine and prolonged supply chain disruptions that have exacerbated already-elevated inflation.

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Without significant improvements on these fronts, Michelle Meyer, chief US economist at Mastercard, warned that many of the gains in the historically robust US economy and red-hot labour market may begin to erode.“They need to start to see results in terms of a moderation in inflation, and if it goes the other direction and inflation continues to accelerate, then the Fed is in a more tricky position,” she said. “They’ll have to hike even faster and that could create more damage to the real economy.” Powell said the Fed would need to see “compelling evidence” that inflation was coming down — specifically, a string of monthly reports showing that price pressures are consistently abating — before it was ready to pull back. The issue with that, according to Tom Porcelli, chief US economist at RBC Capital Markets, is that future inflation prints could be even worse than the May readings that prompted the Fed to rapidly increase the pace of tightening.“Where do you think headline prices are going within the next couple of months? They are only going higher,” he said. “If this meeting came with a 75 basis point increase and you had an 8.6 per cent inflation rate, and now it’s going to accelerate beyond where we were to 9 per cent — what do you think is going to happen in July?”

Porcelli said this dynamic could take root through to the end of the summer, meaning yet more pressure for the Fed to act aggressively through to September at the earliest.While Powell indicated the Federal Open Market Committee was likely to choose between a 0.5 percentage points rise and a 0.75 percentage points increase at its July meeting, Julia Coronado, a former Fed economist now at MacroPolicy Perspectives, said the Fed was more likely to boost the size of its increases — even to a full percentage point — than it was to moderate. “There’s a risk they are going to hike even more than they are saying in the [dot plot], given what Powell laid out and how trigger happy they are,” she said. “The risks of recession have definitely risen because they are not tolerating anything and they’re going to react to everything in a hawkish direction.”Additional reporting by Eric Platt in New York More

The writer is founder of the hedge fund advisory Totem Macro and former head of emerging markets at Bridgewater Associates We’re at the sort of inflection that only strikes once or twice a century. That’s what makes it tricky. Most people alive today grew up alongside a simply historic rise in financial wealth. We know nothing but relentless asset appreciation, propelled by disinflation and falling rates. Liquidity outpaced the economy. So did asset prices. But violent financial and geopolitical regime change is upending that status quo and the bubbly valuations that hinge on it. Disinflationary, liquidity-dependent assets are of course the opposite of what you want under opposite macro conditions. But after 40 years of hyperfinancialisation and the recent orgy of money-funded speculation, these assets are most of global market capitalisation.What good is financial wealth, if not to ultimately spend it? The period of building “paper claims on real things” is over, and these claims are being called in. So assets deflate and “real things” inflate. Aggregate measures like market cap-to-GDP and wealth-to-income are down, but barely off extremes. In this new era, a lot of the “financial wealth” we built will prove illusory.These arcs of history are bigger than any man, but Richard Nixon’s gold and China policies set the parameters of the world we’re now leaving. More money was printed since the US abandoned the gold standard than during any other peacetime period. We spent more than we made. But globalisation simultaneously supplied us with output from the world’s cheap labour, and a privileged ability to import the world’s savings. Global integration kept prices down and the dollar supported, funding twin imbalances by supplying ample buyers for US paper, which of course only went up in that regime just like all assets. This was turbocharged by a unique global peace under a unipolar dollar standard. The point is that it was a virtuous cycle, and it was a fluke.We bookended secular US exceptionalism with cyclical US exceptionalism. The old-economy boom gave way to a new-economy bubble. Winners naturally rotate across cycles, and that rotation was overdue before the Covid-19 pandemic. Then our great leaders seized the excuse to take printing-and-spending to an unsustainable extreme. So what’s now happening is the inevitable cyclical baton-pass, secular regime change and a monetary contraction of untested size (always bad) — all from bubble levels.There is no immaculate disinflationary force to counteract the demand shock this time. This isn’t a supply crunch — volumes of almost everything are at highs. But immaculate disinflation is what is priced in. Markets expect inflation and interest rates to converge at around 3 per cent, with negative real rates the entire time. Seasoned watchers of emerging markets know a Brazilian policy mix gets you a Brazilian growth/inflation mix. The economy is overheating, external dependencies are growing, real rates are negative and policymakers are just waking up. Next step, your currency falls and inflation persists until you give your foreign creditors the positive real returns they demand, crushing the economy at the same time. What EM investors have never seen is how this macro volatility looks on overleveraged DM balance sheets. Volatility and leverage are antithetical concepts. So, inflation must remain above interest rates to first eat through the debt. The base case must therefore be a repeat of the inadequate tightenings and chronic inflation of the 1970s.There are countless strategies, but only two ways to make money in the markets. You can bet that something’s going to happen that’s not priced in, earning alpha. Or you can position yourself along the spectrum of “zero-to-max risk” and earn the prevailing rate. This gets you returns on cash or a positive risk premium, beta. Cash pays below inflation, while risk premiums are historically small. Assets quite simply extrapolate what were always fundamentally unsustainable cyclical and secular conditions. So you’ll need to get real returns from alpha. The “thing that’s not priced in” is that both inflation and interest rates will be much higher, for much longer, than the markets are willing to price. Both are, independently, a death knell for assets, at least in real terms. Higher rates won’t bring down inflation if they remain below nominal growth, because in that world cash flows are rising faster than the cost of acquiring and servicing them. But the end of abundant liquidity can certainly crush assets trading at many multiples of sales.@TotemMacro More

Your browser does not support playing this file but you can still download the MP3 file to play locally.Gideon talks to the billionaire investor Ray Dalio about the connections he’s found between the rise and fall of markets and the rise and fall of nations. Clips: CBS, CNBC, BBCMore on this topic: Policy errors of the 1970s echo in our timesFed begins quantitative tightening on unprecedented scaleTop investors split on direction of ‘tempestuous’ China’s marketsSubscribe to The Rachman Review wherever you get your podcasts – please listen, rate and subscribe.Presented by Gideon Rachman. Produced by Fiona Symon. Sound design is by BreenRead a transcript of this episode on FT.com See acast.com/privacy for privacy and opt-out information.Transcripts are not currently available for all podcasts, view our accessibility guide. More