Economy

Five years on from the first pandemic in more than a century it is salutary to recall how working habits were upended, leisure was curtailed and family relations severed because of the Covid-19 lockdown — except, of course, in Boris Johnson’s riotous entourage in Downing Street. Likewise, now that restaurants, theatres and holiday travel are vibrant again, to appreciate how the investment landscape has been radically transformed, leaving us with important questions about how we manage our money.In pre-pandemic days there was little volatility in output and inflation. But everything changed with the Covid-19 lockdown. While central bankers have done well to bring down the ensuing inflationary surge without inflicting big increases in unemployment, inflation is proving difficult to return to target levels. At the same time, higher volatility has become endemic in the markets. Much of that reflects chaotic policymaking by the new Trump administration in Washington, most notably in relation to on-off proposals to impose 1930s-style tariffs on the US’s friends and foes alike. As Steven Blitz, chief US economist at TS Lombard, remarks: “The sum of Trump’s actions can yet skew the economy in any which way, including an implosion of capital spending.”Notwithstanding Donald Trump, and his capacity for economic self-harm, there is no escaping the reality that geopolitics poses a much increased challenge to investors, with Russia’s invasion of Ukraine and an evermore aggressive China combining to raise volatility. Yet one immense benefit of the Trump administration’s wavering commitment to Nato is that it has caused a dramatic policy shift in Europe, especially in Germany. Friedrich Merz, winner of the German election last month, has pledged to retreat from his country’s long-standing fiscal conservatism and aversion to defence spending by amending Germany’s constitutional debt brake.This is a remarkable watershed and is part of a wider recognition in Europe that military and infrastructure spending has to be increased significantly. A postwar settlement whereby Europeans enjoyed a peace dividend that helped finance generous welfare systems while defence spending declined under the protection of a US security guarantee has been reversed.After years of economic stagnation in the Eurozone, this sea change holds out the hope that fiscally expansionary rearmament will put Europe back in business. And after years of low European stock valuations relative to the US, surging share prices, led by the European defence sector, suggest that global capital is reappraising European prospects.That said, an important factor weighing on markets is the debt legacy of the pandemic and the earlier period of ultra-low interest rates. Across the developed world public debt is now at record levels.Government budgets will be further stretched by the need to support health spending and pensions for ageing populations along with higher defence and climate-related spending. With interest rates having normalised since the inflation rise, borrowing costs on all this debt have risen and will cause pain and mounting defaults as debt is refinanced over time.The good news around this interest rate normalisation is that defined contribution pension scheme members can now earn respectable returns as they de-risk their pension pots by shifting from equities into bonds and cash before retirement. This is in contrast to the pre-pandemic period when bonds — supposedly safer investments than equities — were seriously overvalued.The bad news is that these levels of debt could be financially destabilising. In the judgment of William White, former economic adviser at the Bank for International Settlements, continuing inflationary pressures and higher real interest rates are likely to endure for much longer than most people currently envisage. Thus, he says, a serious global debt crisis seems likely.He also observes that the three recessions preceding the pandemic were all triggered by financial disturbances, each following a long period in which debt was rising faster than GDP and asset prices were also rising rapidly. This is a salutary reminder of how finance has become the Achilles heel of the real economy.Another striking change in the investment landscape over the past five years is the outright victory of passive funds over actively managed funds in terms of market share. This has been a boon for private investors because the very low fees on indexed funds ensure enhanced returns over the long run relative to higher charging active funds which have on average underperformed the indices in recent years.A further advantage of passive investing is that with most defined contribution pension funds investing substantially in benchmarked global equity portfolios, home bias — investors’ preference for assets in their own domestic markets — is eliminated. That tends to enhance performance, although there is growing political concern about pension funds’ neglect of UK equities.Yet with indexing there is a new risk of investment concentration. The percentage of US stocks in the MSCI and MSCI All Country World indices has long been at all-time highs. This partly reflects the enormous market capitalisations of big US tech stocks, notably the so-called “Magnificent Seven”: Nvidia, Apple, Amazon, Alphabet, Meta, Microsoft and Tesla. It follows that markets are vulnerable to the performance of just a handful of corporate giants. This also raises questions about systemic risk.Note here in addition that Elroy Dimson, Paul Marsh and Mike Staunton in the UBS Global Investment Returns Yearbooks have established that over more than a century investors have placed too high an initial value on new technologies, overvaluing the new and undervaluing the old. Also worth noting is that while US equities outpaced European markets from 2010 to 2020 US performance was worse in the decade before, because of the bursting of the dot.com bubble and the subprime mortgage crisis.In sum, we are in a new world of geopolitical friction, increased volatility, greater vulnerability to inflation, excessive debt and heady equity valuations. How should investors respond to this toxic mix?The first priority has to be diversification and a more defensive portfolio stance. Modern portfolio theory (MPT) tells us that if investors add non-correlated assets to their portfolio they can enhance returns and reduce risk. This, according to the late Harry Markowitz, the pioneer of MPT, is the only free lunch in investing.The snag is that even a very diversified portfolio cannot make money in a steep market decline. In a market crash equities and bonds tend to move in lockstep. They cease to be negatively correlated.This makes the case today for an asset that was anathema in the pre-pandemic period, namely cash. Back then the return on cash was dismal. And over the long run cash underperforms equities and bonds. But in periods of extreme volatility it offers genuine diversification against bonds and equities. And in periods of low inflation it is a solid store of value. For private investors, cash is thus a vital portfolio hedge in current circumstances.Another obvious hedge against the plethora of post-pandemic risks is gold. The yellow metal is, in one sense, a paradoxical safe haven. It yields no income and is thus a purely speculative asset. As the great investment sage Warren Buffett once remarked, “Gold gets dug out of the ground in Africa, or some place. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”Well, yes. But gold has form going back to the ancient Greeks who associated it with the gods. And, as the economist Willem Buiter has pointed out, gold has had a positive value for nigh on 6,000 years, making it the longest lasting bubble in human history. That pedigree means it is a genuine hedge in the present financial turbulence against future inflation and geopolitical risks.  The trouble is that the gold price keeps hitting new peaks, despite the fact that the opportunity cost of holding a non-income producing asset has greatly increased with the normalisation of interest rates.This is probably not the time to head for the exit, not least because central bank reserve managers around the world are seeking alternatives to the world’s fiscally challenged reserve currency, the dollar. But investors should recognise that the gold price tends to overshoot both upwards and downwards over long periods. Those who bought at the peak of the 1971-81 bull market in the metal saw a loss on their investment in real terms of much more than half over the next 20 years.What, then, of the qualities of crypto as a portfolio hedge? The key point is that there is even less underlying value than in gold. Saul Eslake and John Llewellyn of Independent Economics point out that these instruments neither represent a claim on assets (unlike shares or mortgages), nor have they any alternative use (unlike gold, other commodities and property). Their primary uses, they add, appear to be to enable payments by criminals and to scammers, and to provide speculators with more fodder. They are only worth what people in their collective wisdom think they are worth.Meantime, Maurice Obstfeld, former chief economist of the IMF, argues that a fundamental problem with most cryptocurrencies, aside from stablecoins, are that they are disconnected from the real economy and operate beyond the reach of public policy. They thus introduce significant uncertainty into financial transactions, making them an unreliable foundation for economic decisions. Even stablecoins, he adds, are only as good as the assets backing them.So this, compared with gold, is a very immature, low-quality bubble. But judgments about it are complicated by Trump’s declaration that he wants the US to be the “crypto capital of the planet”. This is accompanied by much talk about the creation of a bitcoin reserve to purchase US government debt. Once again, investors and speculators are hostage to potentially chaotic policymaking. Be well advised to leave this minefield to criminals and credulous retail investors taking time off from punting in frothy meme stocks.Is my advocacy of essentially defensive portfolio positioning unduly cautious, you might ask. Good reasons to raise this question include the prospect of almost certainly unsustainable debt-driven expansion in the US under Trump and, in the light of Europe’s shift to a defence build-up, a fiscal lift across Europe. Equally important, we live in a world of asymmetric monetary policy where central banks rush to put a safety net under markets and banks when they collapse, but impose no caps on soaring asset prices. This is potentially a general anaesthetic for permabears.Yet the level of debt in the developed world is extraordinarily high. According to the Institute of International Finance, a bankers’ trade body, global debt hit a record high in 2024 of $318tn. The implication is that bond vigilantes may be due to make a comeback. If this is right, as the British experience of the short lived Liz Truss government suggests, we are heading for an era of greater interest rate instability and potential financial shocks.In this new world, value no longer looks a disaster relative to growth. Government bonds, offering positive real yields, are no longer the pre-pandemic graveyard they used to be. Boring equities look modestly interesting relative to whizzy tech stocks. But in the face of unusually high uncertainty, the mantra has to be diversification. For many private investors, it has been a wild, lucrative five years; now cash should definitely be back on the agenda               More

Unlock the White House Watch newsletter for freeYour guide to what the 2024 US election means for Washington and the worldThe US has imposed visa restrictions on current and former Thai officials who were involved in the forced repatriation of Uyghur Muslims, as part of a new policy to support groups subject to torture in China.The policy will target foreign officials who are complicit in efforts to forcibly return ethnic or religious minorities at risk of persecution to China.“We are committed to combating China’s efforts to pressure governments to forcibly return Uyghurs and other groups to China, where they are subject to torture and enforced disappearances,” said Marco Rubio, secretary of state. “In light of China’s long-standing acts of genocide and crimes against humanity committed against Uyghurs, we call on governments around the world not to forcibly return Uyghurs and other groups to China.”Rubio said the action against the unnamed current and former Thai officials was a response to their involvement in forcing 40 Uyghurs to return to China in late February. Thailand is a defence treaty ally of the US but the country is nervous about antagonising China, which is much more important to the south-east Asian nation from a trade perspective.The state department did not specify what the visa restrictions would entail, but such measures generally refer to the denial of visas to enter the US. Rubio said the measures could also apply to family members of any officials found to be facilitating repatriations.The Uyghurs are a Turkic ethnic minority from the northwestern Chinese region of Xinjiang. In 2022, the UN High Commissioner for Human Rights accused Beijing of committing “serious human rights violations” in the way it has treated Uyghurs and other Muslim ethnic minorities in Xinjiang. China has over time forced more than 1mn Uyghurs into detention camps in Xinjiang, sparking criticism from many countries around the world. Beijing has repeatedly denied it has persecuted the Uyghurs.The policy is an early indication of how President Donald Trump will respond to human rights violations involving China. At the end of his first term, then secretary of state Mike Pompeo accused Beijing of committing genocide. His successor in Joe Biden’s administration, Antony Blinken, later repeated the accusation.Rubio was one of the loudest critics of China and its human rights record when he served in the US Senate, alongside Mike Waltz, a former army Green Beret and Florida congressman who is now national security adviser.Many China experts believe Trump wants to reach some kind of wide-ranging deal with Beijing that would involve trade and other issues. One thing they are watching out for is how the president and his officials talk about alleged human rights violations in China given the possible implications for any broader negotiations with President Xi Jinping. More

Unlock the White House Watch newsletter for freeYour guide to what the 2024 US election means for Washington and the worldWall Street stocks rallied on Friday at the end of a volatile week of trading as hopes grew that the US government will avoid a costly shutdown.The blue-chip S&P 500, which on Thursday fell into a correction, rallied on Friday to end the session 2.1 per cent higher — the best day since November 6. All 11 sectors gained ground, with energy and financial services among the best performers. The tech-heavy Nasdaq Composite rose 2.6 per cent, erasing losses from the previous session.The moves came after Chuck Schumer, the top Democrat in the US Senate, signalled his support for a Republican stop-gap funding bill, increasing the likelihood that Congress will avoid the risk of a government shutdown.Friday’s market rally marks a bright spot for US equity investors who have suffered a bruising few weeks as President Donald Trump’s erratic tariff announcements have weighed on confidence and fanned concerns about slowing growth in the world’s largest economy. Data released by the University of Michigan on Friday morning showed US consumer sentiment tumbled in March, with long-term inflation expectations surging to their highest level in more than three decades and unemployment fears rising to levels last seen in 2008. Equity investors nonetheless opted to buy the market dip.“A volatile week is ending with a small flurry of what traders interpret as good news,” said Thierry Wizman, global FX and rates strategist at Macquarie. “The US government isn’t shutting down, China may seek to prop up its consumer sector further, Germany advanced toward fiscal reform and Canada and the US turned down the heat of tariff discussions.”Wizman warned, however, that uncertainty triggered by Trump’s tariff threats remained “problematic”.JPMorgan on Friday became the latest Wall Street bank to lower its 2025 US growth forecast, echoing recent downgrades from Goldman Sachs and Morgan Stanley. “Consumers’ concerns about the impact of the Trump administration’s policies are growing,” said Harry Chambers of Capital Economics, adding that the University of Michigan survey would “fan recession flames further”.European stocks ended the day higher, with the region-wide Stoxx Europe 600 up 1.1 per cent and Germany’s Dax rising 1.9 per cent. London’s FTSE 100 rose 1.1 per cent. Asian stocks also closed higher. Hong Kong’s Hang Seng index added 2.1 per cent while China’s CSI 300 index of Shanghai- and Shenzhen-listed shares rose 2.4 per cent after Beijing promised fresh measures to “boost consumption”. Japan’s Topix gained 0.7 per cent.In commodity markets, prices for Brent crude, the international oil benchmark, rose 0.9 per cent to $70.51 per barrel. Gold surged to a record high above $3,000 per troy ounce before falling back to $2,981. More

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Unlock the White House Watch newsletter for freeYour guide to what the 2024 US election means for Washington and the worldOne of the many notable things about the beating under way in US stock markets is that US government bonds are not really picking up the slack. This is not a good sign.Treasuries are typically the yin to stocks’ yang. When stocks take a hit, bonds generally jump as investors flock to safer shores. They are known as the “risk-free” asset after all. This is a mechanism that has helped many a diversified portfolio over the decades, with only rare exceptions. In this month’s rapid stock market shakeout, however, the balancing act is not quite working out. US stocks are being monstered, down 5 per cent this month so far, and we are only halfway through March. We’re down 8 per cent since mid-February. At the same time, bond prices have picked up over the course of this year, but not dramatically so. Crucially, benchmark 10-year US government bonds are at roughly the same level now as they were at the end of last month.This tells you that this is a sentiment shock. It’s not the economy, stupid. That makes it harder to fix. The data on the US economy is wobbly but not terrible, certainly not as ugly as the markets shakeout would suggest. US inflation slipped back to 2.8 per cent in February, a sign that the economy is weakening a bit but not tanking.But that’s not really what is putting off investors. “We are selling US assets as we speak,” Michael Strobaek, chief investment officer at Swiss private bank Lombard Odier, told me on Friday morning. “We are going through the valley of pain right now.” This is quite the switch in view. This time last year, Strobaek was talking about the “geostrategic” imperative of buying and holding US stocks. At the turn of this year he was still all-in on American exceptionalism.The US economy has not changed his mind. Instead, it was what he calls US vice-president JD Vance’s “ultimate provocation” to Europe in his speech to the Munich Security Conference in February. Then it was Donald Trump’s ghastly treatment of Ukrainian President Volodymyr Zelenskyy in the White House days later. Then it was the threat of US tariffs against Mexico and Canada. “It’s absolutely clear they are hitting this agenda with a sledgehammer,” Strobaek said. He is now retreating out of stocks and into bonds and cash instead.At some point, the constant flip-flopping on tariff policy from the Trump administration will hurt the real economy. Wealthy Americans are heavily exposed to now swiftly sliding stocks, so this will hit them in the pocket. Companies will pull back on spending, in case they are walloped with a random and painful policy shift. Even more alarming for investors, the uncertainty makes it very difficult to make earnings forecasts with any conviction, leaving fund managers flying blind.Some content could not load. Check your internet connection or browser settings.The mood is dreadful. Trevor Greetham, head of multi-asset at the UK’s Royal London Asset Management, noted that in his sentiment tracker, running all the way back to 1991, the past few days rank in the 50 grimmest in the market that he has observed. This period is churning out days right up there (or down, I guess) with such entertaining episodes as the failure of Lehman Brothers, the euro crisis, and — one for the finance hipsters here — the demise of the Long-Term Capital Management hedge fund in 1998.Again, Greetham points out, it’s not the economy that is hurting here. It’s the tariffs, the geopolitics, the uncertainty itself doing the damage. And “central banks are not there for you for that”. In other words, the Federal Reserve is not going to ride to the rescue as it did in, for example, the Covid crisis five years ago.If investors did believe the Fed would gallop in on a white horse to cut rates and fix the mess, bonds would be markedly stronger than they are today. Instead, investors are looking ahead to a slower growth, higher inflation future that monetary policy can’t easily fix. That leaves no short-term catalyst to turn this situation around. Barring a personality transplant for the US president, an intervention from an adult in the room or a sudden crash in the real economy that sparks massive Fed cuts, there’s nothing to stop the rot. “We’re in falling knife territory,” Greetham says.Treasury secretary Scott Bessent has dismissed the impact of “a little volatility” in stocks. The White House message is short-term pain for long-term gain. Wall Street heavyweights from Goldman Sachs and Blackstone have this week praised the potential upsides of Trump’s beloved tariffs. I’ll have whatever they’re having. Even if the administration wanted to pressure the Fed to make cuts, that would be viewed by investors as an unseemly intervention in the central bank’s independence that would probably make matters worse.Everything has a price, and temporary bounces in broad declines are par for the course. At some point, US stocks may become cheap enough to reel in the bargain hunters. But at a price-to-earnings ratio of 24 times, compared with 17 in Europe, it is hard to argue we are there yet. Fund managers are left with scant reason for optimism. Maybe US investors will not notice Trump’s proposed 200 per cent tariffs on proper French champagne after [email protected] More

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The University of Michigan Survey of Consumers for March posted a reading of 57.9, a 10.5% decline from February and below the Dow Jones consensus estimate for 63.2.
The one-year inflation outlook spiked to 4.9%, the highest reading since November 2022. At the five-year horizon, the outlook jumped to 3.9%, the highest since February 1993.
While the measure is often prone to disparities between parties, survey officials said sentiment slumped across partisan lines along with virtually all demographics.

Consumer sentiment took another hit in March as worries intensified over inflation and a slumping stock market, according to the University of Michigan’s latest sentiment survey released Friday.
The survey posted a mid-month reading of 57.9, which represents a 10.5% decline from February and was below the Dow Jones consensus estimate for 63.2. The reading was 27.1% below a year ago and was the lowest since November 2022.

While the current conditions index fell a less severe 3.3%, the expectations measure for the future was off 15.3% on a monthly basis and 30% from the same period in 2024.
In addition, fears grew over where inflation is headed as President Donald Trump institutes tariffs against U.S. trading partners. New duties on aluminum and steel took effect Wednesday, and the president this week also threatened 200% tariffs on European Union liquor after the EU hit U.S. whiskey and other goods with 50% levies.
The one-year outlook spiked to 4.9%, up 0.6 percentage point from February and the highest reading since November 2022. At the five-year horizon, the outlook jumped to 3.9%, up 0.4 percentage point for the highest level since February 1993.
Stocks largely brushed off the report, holding in positive territory while Treasury yields moved higher.
Though the measure is often prone to disparities between parties, survey officials said sentiment slumped across partisan lines along with virtually all demographics.

“Many consumers cited the high level of uncertainty around policy and other economic factors; frequent gyrations in economic policies make it very difficult for consumers to plan for the future, regardless of one’s policy preferences,” Joanne Hsu, the survey’s director, said. “Consumers from all three political affiliations are in agreement that the outlook has weakened since February.”
Expectations fell 10% for Republicans, 24% for Democrats and 12% for independents, Hsu added. Sentiment overall has fallen 22% since December.
The inflation outlook contradicts reports earlier this week showing that consumer prices rose less than expected while wholesale prices were flat in February.
Markets largely expect the Federal Reserve, which aims for a 2% inflation rate, to stay on hold when it concludes its two-day meeting Wednesday. Traders, though, are pricing in 0.75 percentage point of interest rate cuts by the end of the year, starting in June, according to the CME Group’s gauge of futures pricing.
Correction: Joanne Hsu is the survey’s director. An earlier version misspelled her name.

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Unlock the White House Watch newsletter for freeYour guide to what the 2024 US election means for Washington and the worldIt now appears that neither a slowing economy nor plunging stock prices are enough to deter US President Donald Trump from his radical economic agenda. Beyond promising to buy a Tesla to prop up the beleaguered stock of Elon Musk’s enterprise, he is in fact doubling down. Asked about the economic and market turbulence, the self-proclaimed “tariff man” argues that a “period of transition” may be necessary as his administration brings “wealth back to America”. It is “a detox period” according to Treasury Secretary Scott Bessent. The cleanse has, so far, raised the spectre of stagflation, wiped $5tn off the S&P 500, and undermined the nation’s standing with global investors.The short-term pain might be easier to digest if the means — and the ends — were intelligible. Indeed, if the overarching goal is to, however vaguely, “Make America Great Again”, then the hotchpotch of economic measures that Trump has so far offered lacks any coherent theory of change to get there.Take Trump’s central plan to rebuild 25th president William McKinley’s tariff wall around America. The idea is to urge foreign companies to set up factories in the country, spur a renaissance in manufacturing jobs, and use revenues from import duties to slash taxes. These aims are antithetical: if more production did shift to the US, tariff revenues would suffer. Then there’s Musk’s so-called Department of Government Efficiency. Curbing bureaucratic excess is worthwhile. But Doge has been undermining its own efforts. It recently sacked a team responsible for using technology to streamline public services. A plan to cut the Internal Revenue Service’s staff by as much as half would also weaken tax collection.Next, Trump wants the US shale sector to “drill, baby, drill”. But his team has also indicated a desire to see crude prices fall to support consumers, perhaps to $50 a barrel or lower. That would be uneconomical for US producers. US energy secretary Chris Wright added this week that higher oil production could come through innovation. If so, fomenting economic uncertainty, including through on-and-off tariffs, is no way to encourage it or the broader manufacturing boom the administration seeks. Trump’s national strategic reserve of Bitcoin — an inherently volatile asset, with a lack of obvious utility — is another befuddlement. Finally, there’s the rumoured effort to weaken the dollar — perhaps in a so-called “Mar-a-Lago accord” — to help turn America into an industrial export powerhouse. A global deal would probably be a non-starter when key trade partners are peeved by Trump’s tariff threats. Nor does everyone in the administration seem to be on the same page. Bessent recently insisted that the Treasury’s strong dollar policy remained intact.What can investors and companies deduce from all this? One is that assuming this administration will operate coherently is a gross oversight. Some even wonder if the chaos is part of a deliberate grand plan to restructure America’s economy and its place in the global system. Either way, the end result is a loss of economic confidence. Now even the promise of tax cuts and deregulation is losing its allure amid the unpredictability.Trump may continue to paint a weakening economy and falling markets as part of a disruptive yet necessary shift for America’s greater good. But the longer his methods remain inscrutable, while heaping costs on to households, businesses and investors, the harder that sell will become. Indeed, rather than trading pain today for a brighter tomorrow, it seems increasingly as though America is swapping its long-established model for an amorphous and far-fetched notion of a future one. More