Summary

Helen’s central thesis is that markets have not adequately priced in GDP lost due to the pandemic. She see’s political risks on the horizon, limits to fiscal and monetary policy effectiveness and an impairment to the velocity of people as fear impacts spending patterns. In her view there is a greater risk of stagflation than reflation.

The recovery will break the political consensus as an even more fragmented electorate comes to the fore. The new divide is authoritarian versus libertarian. In the UK Conservative MPs have voted against coronavirus restrictions despite being pro-Brexit and ostensibly pro-Boris. This is because Boris has shifted but his party have not. He is a chameleon who responds well to the mood of the public but his majority now looks shaky which could be problematic in the future. The European Research Group, now the COVID Recovery Group led by Steve Baker, who was such a thorn in Theresa May's side, is going to be important to monitor.

Helen regards Germany as one of the bigger unpriced risks this year. The Federal Election is taking place in September and we are passed the age of Angela Merkel. But we're now already in the first stages of uncertainty over the direction of Germany, which, of course, given its importance and size in the EU, means uncertainty hanging over the whole European project. In Germany, it's looking like the CDU are losing that momentum. It may very well be that the CDU even struggled to form part of the next government.

In the US, creating a consensus is going to be very difficult for the Biden Administration and is the reason Helen believes fiscal stimulus will be very difficult to pursue over the months ahead. In an emergency it is easy, but in a recovery, much tougher. So, whatever it takes is dead. Her thesis has always been that the wall of money doesn't save the economy because so much of what's happened has been driven by fear. In terms of monetary policy Helens biggest concern about central banks is that the market-maker of last resort is supposed to keep markets open, not up. And the central banks themselves know that they've backed themselves into a corner. They had to throw everything at it and now they're trying to pull back. In a speech by Andrew Hauser at the Bank of England he spoke of more dysfunction and that we cannot rely on the medicine of the scale and duration seen in 2020 every time. They know they introduced a huge risk-seeking liquidity impetus, which tends to lead to extreme leverage and then blow ups of which we've seen many already this year. The latest being Archegos and of course the GameStop debacle and Greensill. In addition, Fed backstops such as PDCF, CPFF and MMMF have ended. The Fed no longer purchases ETFs. Helen thinks that was one of the most significant interventions and created a short squeeze this time last year on all the shorted ETFs on corporate debt.

In the meantime the UK is critically exposed to higher interest rates as the median maturity of UK debt is around four years. If you take into account national savings and insurance and other floating rate liabilities, the median maturity of UK debt will be less than one year by March next year. That is truly frightening for a Chancellor sitting on the biggest pile of debt we've seen since the war.

The actual impairment to economic growth has still not been reflected in financial markets. Even if two thirds of savings came back you'd still be at a savings rate consistent with the recessions of 2008/9 and of the 1980’s and 1990’s. In the UK savings are in the high-income categories which have a lower propensity to spend. In the US one of the most recent surveys found that 62% of millennials are thinking of saving or investing their stimulus cheques. Very few are actually planning any big expenditure. Fear is a defining factor. Post-traumatic stress lasted three years after SARS. The question is can the hedonists outweigh the hibernators? It is Helens opinion the answer is no. At Jackson Hole last year a paper presented at the Fed Symposium, a schematic model that showed that from pandemics you get capital obsolescence, but you also get belief scarring. People change their behaviour. They had a couple of different scenarios, but overall the costs over 10 years was 10 times larger than the first year - long-term scarring happens. Fear casts a long shadow.

That said Helen likes equities over bonds because there is going to be some technology companies that do really well in this new normal virtual world. She does not hate bonds altogether as there is going to continue to be QE. The central banks will continue to try and keep a lid on things. Cryptocurrency should be held in a diversified portfolio.

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