Apart from soul-searching on the endgame for Covid—see my version here—the arrival of Omicron seems to have had two relatively predictable effects on financial markets. Volatility has shot higher, and the yield curve has flattened. Put differently, stocks have sold off, and the long bond has rallied. The MSCI World is down just under 4% from its peak at the start of November, and the U.S. 10-year yield is off some 25bp. Neither of these numbers are dramatic, but they’re eye-catching, all the same. I suspect these shifts are driven by both fears of Omicron—despite little hard evidence that it is the vaccine-evading super-bug everyone has feared—and the fact that monetary policymakers so far have had little interest in changing their stance. More specifically, Fed officials have said nothing to shift expectations that it is expected to taper QE to zero by the middle of next year, and start raising rates shortly thereafter.
Read MoreHaving 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 MoreI am still not entirely sure whether Noah Smith, a U.S. Economist and prolific blogger, is a converted MMTer or not. But I do know that he is doing a great job in describing the discourse around this newfound holy grail of macroeconomic policymaking. In my attempt to label MMT as “Woke Economics”, I leaned on some of Noah’s earlier pieces on this, and now he is back with his invocation of the new Macro Wars. The stage, according to Noah, is the recent fiscal relief bill in the US, prompting even otherwise pro-stimulus economists to push back. Oliver Blanchard and Lawrence Summers both suggest that $1.9T might be too much of a good thing, while Krugman is sticking to his Keynesian ethos, arguing that Biden’s bill really is ‘disaster relief’, a position that Noah seems to agree with. Replying specifically to Noah’s recent post, he argues that Keynesianism won the theoretical battle a decade ago, leaving only “cranks, charlatans and WSJ Op-ed writers” on the other side. Tyler Cowen chimes in, pointing out that Biden’s post-election fiscal stimulus push has as much to do with populism as it has to do with careful application of Keynesian macroeconomics. As it turns out, this is a position I have a lot of sympathy for.
Read MoreFirst things first, I am GBP-based investor, which means that I need to think about both the value of currency and asset, when I dip my toe into US financial markets. With GBPUSD pushing 1.40 and the US 10y motoring bast 1.5%, I had to do something last week, and that something was to buy some duration in the US. I thought that I’d put that up front, because in what follows, I will sound like a broken record It is now getting feisty in bond-land. The sell-off in US duration got rowdy last week, and is now starting to pull up bond yields in Europe. What’s more, front-end curves are steepening too, which is to say that markets are now trying to bring forward rate hike expectations into market-relevant forecast horizons. As I have explained on these pages since the beginning of the year, investors and strategists are still debating whether this is all part of the plan—reflecting a desired increase in growth and inflation expectations—or whether it constitutes an undue tightening in financial conditions. Market observers remain undecided, partly because policymakers can’t seem to figure out where to draw the line either. Higher bond yields are good, so long as they don’t become a constraint on the recovery via a tightening of financial conditions. In principle, there is nothing wrong with this position, though it also invites the situation we now find ourselves in. Put simply, yields will motor higher until something breaks, or until policymakers call it quits.
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