Having just spent ten days on the beach in Ibiza, I am able to provide strong circumstantial evidence that European tourism is back, at least for a while. Granted, the clubs—which I am now too old to go to anyway—are still closed, but hotels, restaurants and beaches were full as ever. Given that 80-to-90% of activity on the island takes place outside, in a sunny and relatively windy coastal environment, the virus wasn't much of a threat, even though numbers had been climbing prior to our arrival. Indoor mask mandates, which are now commonplace, really was the only sign of the virus as far as we were concerned, notwithstanding having to navigate the byzantine testing and tracking rules for travel. The Dutch nurse who performed our pre-travel Covid-test informed me and my wife that tour operators on the island had hoped that August this year would see activity levels return to 50% of its 2019 level, before claiming that the true number is closer to 80%, and that operators are expecting to extend the season into October. If that's true, it adds to the evidence that economic activity in Europe will improve further in the next few months. That’s good news.
Read MoreIt's difficult to think of a more politically incorrect idea than recommending investors to allocate money to China's government bond market, ostensibly by selling a portion of their U.S. treasuries. Granted, this would actually be consistent with the rebalancing of the bilateral U.S.-Sino trade relationship that the most ardent critiques of China's economic model desperately want. Or perhaps what they really want is a strong dollar plus capital controls? It is difficult to tell sometimes. That said, it is fair to say that lending money to China's government to fund domestic investment, some of which invariably will go to defence, probably doesn't get you on the White House's Christmas list. Incidentally, and before I flesh out the trade, I should make one thing clear. I think the mismatch between the increasingly tense geopolitical relationship between China and the U.S., and the fact that capital and goods still flow more or less freely—with the exception of direct outflows from China's mainland—between them represent an enormous tail risk for markets.
Read MoreI’ll keep it short this week, mainly because I don’t have much new to say. I continue to think that the tug-of-war between markets and monetary policymakers in fixed income markets remains the key spectacle to watch, even if I concede that we have been watching it for a while. There are economists and strategists who will tell you that policymakers are perfectly happy with steepening yield curves, and that they in fact welcome them. To believe this, however, requires that you forget the initial stages of the pandemic-policy response in which central bankers solemnly pledged to print as much money as needed—via QE—to keep rates pinned across all maturities in order to support the monumental fiscal efforts needed to prevent economic disaster. If you’re telling me that this tacit agreement is now broken on the eve of the new US administration is about to shovel €1.9T into an almost fully vaccinated economy—that’s just shy of 10% of GDP for those wondering—I have to concede that yields can, and likely will, move a lot higher. But is that really what you’re telling me? It seems to me that observers have quietly pivoted towards the idea that central banks obviously accept, even want, higher bond yields to reflect the recovery. I am sorry, but that doesn’t pass the smell test. While a steepening yield curve sows the seeds of its own destruction via an ever more attractive roll and carry, especially with fwd guidance on the front end, there is always a risk that markets end up questing the commitment to low policy rates.
Read MoreIt is tough to look beyond the depressing daily death dispatches from around the world detailing the tally of the Covid-19 epidemic. Yet that is exactly what investors must to do, if they want to have a fighting chance to figure out what happens next. These data are undeniably terrible, but they are known quantities for markets, even in the U.S. and the U.K., where the numbers are rising too fast for their own good. They will continue to rise, for at least a few more weeks, at least. Meanwhile in the world as a whole, two immovable objects are now crashing into each other. We can’t return our economies to normal operation due to the risk of an uncontrollable public health crisis, but equally, we can’t maintain economic lockdowns indefinitely. The circuit-breaker in the form of a coordinated monetary and fiscal stimulus program to the tune of nearly 20% of global GDP is a stop-gap solution at best. This is because that is arguably the level of GDP that developed economies are set to lose through H1 alone. Contrary to popular belief, you can’t just freeze the economy, and then re-start at zero six months later after having printed trillions of dollars. Anyone who makes claims to this effect are, in my view, getting a little too excited about the second-order effects of our present misery, which is the economic shutdown itself, and the associated open invitation to unleash the MMT experiment. Don’t get me wrong, it is the right thing to do, but as I said, it is a second-order effect.
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