In 2021 the world will get vaccinated. The second half of the year should see the start of a strong economic recovery. Democrat election victories in Georgia should result in a significantly more stimulative fiscal policy. However, expectations of a $3,000 billion package seem exaggerated due to the minimal Democrat majority in the Senate as well as the presence there of some centrist, traditional Democrats. Sooner or later, the Fed and other central banks will probably have to fight a too-rapid steepening of the yield curve in order to ensure the sustainability of government debt levels.
Democrats to dominate US politics in 2021
Having won the two Senate seats in Georgia, Democrats have a razor-thin majority in the Upper House: The Senate is 50-50, but Vice President Kamala Harris has the deciding vote and can “tip the scales”.
That said, the 2020 elections failed to produce a “blue wave”. The most ambitious and radical Democrat ideas are thus unlikely to be realized as moderate Democrat senators will not go along them and it only needs one dissident to tip the vote. Moreover, the rule is that 60 votes are needed (out of the 100 senators in total) for control of most business in respect of curtailing filibusters. Thus, expectations of some market commentators for a $3,000 billion bailout package now seem unrealistic. Nevertheless, politics in 2021 will be dominated by the Democrats. The majority of important positions in the Biden Administration will be filled by men and women who have already served in the Obama Administration or even under previous US presidents. US politics will be led by an experienced old guard with little “new blood”. Policy should become more predictable and open, less self-referential, more civilized in communication and more relaxed. We see improved international cooperation in the areas of climate protection, economic stimulus, international trade and in containing the influence of “undemocratic states”. Old alliances are regaining importance and respect. Through the rapprochement between the US and the EU a less disunited front against totalitarian states is emerging. Elsewhere, some relaxation in relations with Iran looks possible.
US to re-join the Paris Climate Agreement
Global climate protection will regain momentum. It may even be possible to introduce an international CO2 tax.
US-Sino rivalry over global hegemony will not disappear
President-elect Biden has already announced that for the time being he wants to keep most of the import tariffs introduced by the Trump Administration. The trade war is likely to be defused, but it is not over. US-Sino rivalry remains and further conflicts (Taiwan, rearmament, South China Sea etc.) are unavoidable.
Big Tech may face greater regulatory pressure
Amazon, Facebook and Alphabet have been among the main winners in the Corona crisis. They have been able to enhance already dominant market positions at the expense of smaller competitors. Under a Biden Administration, regulatory pressure on these companies is likely to increase. The EU has already indicated a legal approach for more regulation with its proposed Digital Services and Digital Markets Acts.
Central banks set to finance further bailouts and to introduce yield curve control
Latest estimates indicate a Federal deficit well over $2 trillion for fiscal 2021 which suggests the Congressional Budget Office will have to revise upwards its September estimate of 8.6% of GDP. The lion’s share of the additional national debt will most likely be financed by the Fed. The situation is similar in the EU and the UK. If central banks do not buy up a large part of escalating government debt issuance, longer-term interest rates would rise significantly, jeopardizing the ability to finance government spending programs. We don’t see an end to this policy of “financial repression” in 2021 either in the US or elsewhere. The (irresponsible) intertwining of extraordinarily stimulative fiscal and monetary policies will continue to gain momentum. It is significant that the incoming US Treasury Secretary, Ms. Janet Yellen, was previously Chairman of the Federal Reserve. She has close personal ties in both institutions and is one of the loudest voices arguing for yet more stimulus and further bailout packages. Ms Yellen’s Fed presidency was characterized by pronounced “dovishness”. She steadfastly opposed a normalisation of interest rates and any reduction in Fed security purchase programmes. Ms Yellen can be expected to push strongly for yield curve control so that the US Treasury can get up to its ears in debt.
A steeper yield curve due to rising long-term interest rates must be “managed” by central banks
The trend towards ever lower interest rates that began in the 1980s could finally come to an end as a belated consequence of the budgetary and monetary policy excess triggered by the Corona crisis. Indeed, it is conceivable that central banks will continue to keep intervention interest rates low while allowing an orderly and managed increase in long-term rates. All the while, governments will finance themselves in an increasingly short-term manner with the help of central banks.
Massive injections of liquidity have pushed up asset prices
Money created by the central banks has primarily found its way into the stock and real estate markets. Due to forced lockdowns, business activity came to a standstill. Companies and private individuals hoarded liquidity (being too fearful to spend) but have allocated it to increasingly risky investments.
Strong economic recovery in the second half of 2021
There are signs of a strong economic recovery in the second half of this year. By then, enough people will either be immune (10%) or already vaccinated (30%) so that most sectors of the economy can return to normal operations. Many consumers and businesses have accumulated exceptionally high savings in recent quarters. Think of the money saved by not having summer and winter holidays with few or no visits to restaurants, cinemas and theaters.
Thus, pent-up consumption desires could unload a strong increase in demand. This could mean some Covid-driven investments get liquidated and find their way into the real economy. We expect the velocity of money in circulation to increase markedly as lockdowns are scaled back. Thus, there is a threat of interest rates rising, not just because of huge government debt issuance and worse government credit ratings, but also because the economy is doing better and demand for credit is picking up, etc. An economic recovery that is “too hot”, a rise in interest rates that is “too rapid”, could weigh on stock markets, more than offsetting the positives of higher corporate profits and fewer insolvencies.
Sentiment is positive
At the start of 2021 virtually all investor sentiment indicators are in very bullish territory. Most investors think they can “see through” the Covid crisis, assuming, probably rightly, that central banks will do all they can to ensure the implementation of huge fiscal rescue packages. Moreover, serious setbacks in stock markets will be countered by massive liquidity injections and, if necessary, central bank share purchases. So long as this remains the basic assumption of investors, they will accept lower risk premiums for holding shares and overlook historically high valuations. Only when the economy is sufficiently healthy and growing very strongly is central bank policy likely to move tentatively towards normalization.
Contact: Thomas Härter, CIO, Investment Office
Telephone: +41 58 680 60 44
Disclaimer: Produced by Investment Center Aquila Ltd. Information and opinions contained in this document are gathered and derived from sources which we believe to be reliable. However, we can offer no under-taking, representation or guarantee, either expressly or implicitly, as to the reliability, completeness or correctness of these sources and the information pro-vided. All information is provided without any guarantees and without any explicit or tacit warranties. Information and opinions contained in this document are for information purposes only and shall not be construed as an offer, recommendation or solicitation to acquire or dispose of any investment instrument or to engage in any other trans action. Interested investors are strongly advised to consult with their Investment Adviser prior to taking any investment decision on the basis of this document in order to discuss and take into account their investment goals, financial situation, individual needs and constraints, risk profile and other information. We accept no liability for the accuracy, correctness and completeness of the information and opinions provided. To the extent permitted by law, we exclude all liability for direct, indirect or consequential damages, including loss of profit, arising from the published information.
In the latest Aquila Focus, Nicolas Peter, Head of Banking & Investments, discusses the continuing rally in US tech stocks and the lack of an interest rate cut in the USA for the time being.
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In 2023, numerous geopolitical risks came to the fore, supplemented by interest rate hikes by central banks in the fight against inflation. The conflict in Ukraine will soon last two years. In addition, the situation in the Middle East has worsened, particularly between Israel and Hamas. An escalation of the conflict to neighboring Arab countries has been prevented so far. Economic weaknesses are also evident in two of Switzerland's key trading partners: China and Germany. These developments are leading to a lack of important impetus from foreign trade. Geopolitical issues will continue to play an important role in the coming year. However, the past has shown that the impact of such events on the global financial markets is often short-lived.
Fewer sustainability investments, but more investments in pharmaceutical companies and the healthcare sector. Artificial intelligence en masse, but shares instead of gold. These are some of the resolutions of independent asset managers in Switzerland for the first quarter of 2024, according to the latest AVI Index.
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