THE BAGS AND THE RECOVERY – “A strange thing about the MY BAG is that whenever someone buys, someone sells, and both they think they are smart”, wrote an author of the last century, William Feather. At that time, it is smart today to buy shares, with viruses flying around, economies slowing down and geopolitical risks gathering?
Well, yes, that's the answer. True, there are risks, but it is a risk also don't take risks. So let's take stock of the different variables, starting withreal economy, that is from the Covid!
Looking at the forest more than at the trees, one can say that the spread of the virus is in ebb: restrictions and vaccinations are containing the infections. Furthermore, vaccines have reduced mortality, hospitalizations and lasting consequences (long Covid). For all that the obligatory vaccination is an obligatory step.b
Il rebound in activity and demand it's more than just a rebound: even if the Delta variant has come, unwelcome guest, to hinder the recovery, the underlying momentum is proving to be stronger than expected. In Italy, for example, we will return to end-2019 levels in mid-2022, a year ahead of schedule.
Where does this strength come from? In addition to the investments, the consumption. The latter are not usually considered an autonomous component, but theexcess savings accumulated in the past causes the propensity to consume to increase today.
Income support from enlightened policies had led to substantial increases in disposable income. However, consumption had stalled, held back by prudence and the physical impossibility of consuming many types of services. today i'little treasures' forced savings are going to service spending, and the major multipliers will maintain the momentum of the economies for a long time.
This is especially true for Italy if – and it is a big 'if' – funds from the PNRR will also lead to an increase in potential income. The increase in Italy's GDP in the next few years could rise at the rate of that of other European countries.
An interesting question revolves around a 'stone guest': China. Napoleon's famous quote – “When China wakes up, the world will tremble” – finds some echo in the events of the last few decades. China is slowing down much more than expected. Why? The virus has something to do with it again and the iron will to keep it at bay. But there's more.
Since China has embraced the market, it has become the first economy in the world, and not only thanks to low labor costs: today China sends a rover to Mars and beats America in the patent tally, and will shortly launch the largest wind turbine ever seen.
This explosion of growth carried with it many inequalities: the Gini coefficient puts it among the most unequal countries in the world. The single party, in the person of Xi Jinping, he must have realized that something was not right with respect to the noble ideals of socialism. So a reverse has begun, or a new leap forward: "Common Prosperity" aims to reduce inequalities, putting a leash and gag on various sectors and various large companies. And here is the question: will all this slow down growth in what is still the prime mover of global expansion?
Here too, however, optimism emerges. President Xi won't want to kill the goose that lays golden eggs. La Chinese economic policy keep many arrows to your bow, in case you need further support. And in the province of Zhejiang, with 65 million inhabitants (like France), they have just launched the five-year plan which hinges on a spread of capitalism (share ownership) between employees and peasants. A capitalism in Chinese sauce, made up of greater participation, more competition and tight regulation to avoid every form of exploitation (even of unsuspecting consumers/savers).
Something similar is happening on this side of the Great Wall. Western democracies aim for more inclusive growth. The USA does it with the tax reform that increases progressivity. The EU does it, for now with the NgEU. Even conservative UK is doing it, which has raised taxes to finance health care spending.
In general inclusive growth also entails lower profit margins, but can lead to stronger and more robust growth (greater propensity to spend at low incomes. And then, in the last few months of rising prices, even the stock exchanges have blown the sails of the recovery, via lower cost of capital, greater household wealth and widespread confidence.
RATES AND CURRENCIES – Little changed rates and exchange rates. Some evidence of an increase for the Bunds, but the spread with the BTPs is always around 100.
The markets believe in the assurances of the big ones Central banks, who have no intention of raising rates. The slowdown of the real economy from the Delta variant helps in this sense, comforting the decisions of maintain an expansive monetary policy stance. And this despite the sharp rise in consumer prices.
Crucial in the thinking of the monetary authorities is the belief that price tensions are not destined to last. Of course, there are also those who are concerned and see the inflation hydra rearing at least some of the seven heads. But drive rings are missing. For example, in the Eurozone, hourly labor costs in the past quarter are at the same level as in the second quarter of 2020 (the nadir of the recession), and the same can be said for unit labor costs in America (with the help, in this case, of productivity).
Price pressures push i down real rates, which are also negative for our BTPs. Apart from the ups and downs of inflation, the level of rates does not pose any obstacle to recovery: real rates will remain below the growth rate of the economies.
Low interest rates favor equity prices, allowing you to discount future profits at a lower rate? This would only be true if future profits were known with absolute certainty. In the absence of this certainty, the result of the 'discount' depends much more on the level of future profits than on the discount rate.
The reason for the correction overshadowed by the very recent developments in stock prices lies in the uncertainty about the continuation of these levels. In any case, the word to use is “correction” as fundamentals remain supportive of equity investing.
Dollar and Yuan have changed little in the last month. The American currency has one factor in favor – the growth differential – and one against – the 'soft power' affected by the chaos of the Afghan withdrawal. Pulled by the two factors, he remains still like Buridan's donkey.
The same can be said for the chinese coin: here too the factors in favor - control of Covid and satisfactory growth rates and in any case comforted by the ammunition in the magazine of economic policies - are combined with those against - the unknown factor of the campaign for 'Common Prosperity' and, in perspective, the ever-present risk that the increasingly numerous middle class wants to claim civil liberties.
INFLATION - The poison is in the tail. Thus the analysis of price dynamics is placed at the bottom of these Lancet. How toxicfor shooting, the huge increase in raw material costs? Toxic is toxic, but not lethal. To the extent that it does not trigger a malevolent inflationary spiral, but rather a beneficial rush to increase production capacity, which will eventually lead to a reduction in those same prices.
But it is true that that increase goes to erode the purchasing power of households (also the margins of companies, which, however, benefit from the very favorable dynamics of labor costs per unit of product).
The erosion of consumers' purchasing power is holding back spending. But that's not the only reason governments are stepping in to alleviate the burden of rising energy bills. A sharp increase in the cost of energy would be antagonizing to households ecological transition, without which environmental disaster would be inevitable.
Interventions to alleviate those increases are also aimed at respecting the objective of creating a green and inclusive economy. Inclusive because the increase in the cost of energy is regressive, weighing this commodity much more on the consumption of families with lower incomes. Green because in part these increases are the result of the transition to renewable energy.
In short, this increase in costs and prices is toxic, but not fatal for the recovery. Or not such as to set in motion that price-wage-price spiral, which through expectations of higher inflation, would force central banks to sharply raise rates and generate a new recession from deleveraging. The danger appears very remote. There are tens of millions of unemployed, underemployed and unemployed, and unions are no longer seen by workers as a leverage to raise wages.
Finally, there is hyper-competition from globalization and technological innovation which moderates price increases. Therefore, even on the inflation front there is something to praise long live the expanding economy.
