2021 – The sign of the four

I HAVE TRIED to summarize four themes that might characterize 2021. The first is Trump’s legacy, or lack thereof. The second is Biden’s burden and what has to change in world trade and international politics. Third is the onset of COVID-19, both as a health issue and an economic problem as sovereign debt rises throughout. EM treasury guaranteed sovereign debt reached 24% of GDP as opposed to 15% a decade ago, and the amount restructured under CAC (Collective Action Clause) has gone up to USD 2.1 trillion. Last but not least, I touch on risk appetite, Fed rates, and commodity prices, which in the short-run matter most for EMs and Turkey.


No, he didn’t invent banal nationalism, everyday fascism, racism, or discrimination. He found them ready and used them to consolidate the flock of already extant ‘white thrash’. The “Hillbilly Spring” on Capitol Hill was testimony to that capacity. Yet this is the only capacity he has had as politician. The real problem lies elsewhere, in economic-cultural developments, from jobs gone to the loss of the New Deal social compact more than half a century ago. The problem lies in ‘bad jobs’ crowding out ‘good jobs’, the wage bill falling drastically, and both wealth and earnings inequality skyrocketing after 1980. No wonder not only the Deep South but most of America feels ill-equipped to deal with the brave new world that requires an increasing amount of skill, at least a decent college degree and sheer luck to find and keep a good job that once was secure. The golden age of American labor is gone, and with it the prosperity of the middle class. Maybe Marx was right when he wrote something similar after the French Commune of 1871: gone labor, gone the middle class. This may not be pauperization per se but it sure is more than skill mismatch due to rapid technological innovation. Fast automation, AI and all that are now around the corner, and past job losses were just a prelude compared to what is coming next. So, how can Biden, a fixture of the U.S. government since 1973, including the whole neo-liberal era, at age 78, be expected to undo what has been structurally entrenched in western economies for half a century such that the deep social divide can be remedied? Except for France, which didn’t entirely dismantle its étatic economic structure, the social divide is now enormous in Western nations, just as it always was in many other economies.


Biden has to repair the damage done to the American executive and to federal politics as well as to local legislation. Of course Trump has been president for only four years, and this is Biden’s luck. Yet all the same, he too has only four years to fix it. Furthermore, the unfinished Obama business -healthcare reform – has already taken its toll. People of color, and poor white people, were disproportionately affected by the outbreak. Without (almost) full healthcare coverage, how many Americans are unsafe, 100 million? What will change in the job market after the outbreak? What is to be done about the now mostly obsolete infrastructure? He will have to fix all these to some extent, and deal with China in a different vein. Because he has already appointed many veterans of the Obama administration, he seems to have in mind a repeat of the second Obama term, and this brings us back to the Obama Doctrine of 2014. Will Iran be invited back to the international scene, despite Israel? Will the U.S. go easy in Latin America? What about MENA? What to do with Russia? And more importantly, what will be the approachto dealing with China? For instance, the Trade Agreement and the TTIP await a clever touch. Because the EU has already signed the CAI with China –but not allowed Chinese capital to acquire IMST – Germany has in fact led the way already: Germany has shown the U.S. how to solve business issues. That is: do business and cooperate with China, but block them when they want to take over high-tech firms or try to get into strategic sectors – exactly what China did thirty-odd years ago when it opened up its economy to foreign capital. Germans have also leaked the reason why he deal was blocked. Clever move, isn’t it? Turkey will come to the table at some point, under MENA of course, but also under the NATO problem, relations with Russia and Europe, natural gas reserves and so on. As such, it constitutes a complicated problem from the standpoint of Biden because the bargaining process can only be intricate and painful given that the issues involved are multifaceted. The countdown may be postponed until after the NATO summit on February 17. Yet because CAATSA is on it will be very difficult to re-negotiate the so many burning issues that are in the wait list before making a move first.


Many countries are expanding the vaccine rollout. In the U.S., as the death toll reached 380,000 and cases 22.7 million out of a population of c. 330 million some states, including Texas, Oklahoma and Alaska have decided to vaccinate all people over 65, even before health workers. Currently there is ample demand and vaccines are being distributed to health employees and the elderly in nursing homes. California has already turned baseball stadiums into vaccination sites. New York is doing the same, and it will use the Met’s stadium in Queens as a mass vaccination site. All vaccination sites are expected to work around the clock. Yet as a consequence of the deep inequalities that poisoned the social fabric of America during the last couple of decades, elderly people in Native communities are dying at a rate double that of white people. On the other hand, Brazil is sending mixed signals as regards the Chinese vaccine that is expected to be widely used here, too. The latest 50.8% efficacy is statistically insignificant, although slightly over the WHO
threshold. The difference between previous reports on confidence intervals is largely due to who is vaccinated during the trials. The vaccine appears to be more effective among those who already show some symptoms. Facing a deluge of cases, governments around the globe are eager to accept whatever vaccine they can get but questions of scientific merit, efficiency and side effects abound. It is difficult to say when but it seems a mixture of vaccination, measures, and the duration of the virus’ spread – its peak spread, though it is multimodal – will determine the outcome. There are no signs yet that it will be over soon.


If it is true that the outbreak is nowhere near its end, clearly loose monetary policy will carry the day. Commodity prices may go up and inflation can increase a bit in the U.S., but I don’t see why the Fed will change its course in 2021. This means lots of dollars, a cheap USD, and a vibrant risk appetite for EM assets. Actually, it isn’t that fixed income friendly, but equities benefit from that. There were are 345 IPOs in 2020 in the U.S., amounting to USD 127bn. Roughly half are under SPAC (Special Purpose Acquisition Companies), however. This means start-up firms, firms with no clear business plan, and the stocks issued may remain speculative. SPAC assets are also called microcap stocks. So far, IPOs have been successful and buyers have benefitted. Is it an instance of irrational exuberance, like maybe the bubble that occurred between 1995 and 2000?

People also wonder why stock prices are going up against a backdrop of stagnating economic activity, or at best meagre earnings growth and weak industrial corporate momentum. Consider a line of argument that gives much food for thought: Investment and valuations display positive co-movement. Bubbles may emerge even when the current interest exceeds the rate of growth of the economy and the corporate sector generates a surplus. And while it is still the case that the emergence of a bubble crowds out resources for investment, the speculative growth dynamics guarantees that investment still booms along the path. By the same token, if the speculative growth path crashes, then the conditions no longer exist for a rational bubble to survive and it must crash as well. Finally, a bubble that emerges early on in a speculative path is costly because it crowds out potentially welfare-improving capital accumulation and overexposes the economy to a crash. Now, real interest rates and in particular the cost of capital faced by growing companies, declined throughout the 1990s, 2000s, and definitely after Lehman, and it is declining again after COVID. The real rate decline is implicit in the bond yields. The difference between the average real rates for the 1980s and 2010s is about 400 basis points. It is more now. Such a decline can account for a significant share of the observed rise in asset prices. The decline in the real rates implicit in U.S. Treasury bonds alone can explain over 50 percent of the rise in broad market’s valuations during the second half of the 1990s, and also after Lehman, and also today.

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