Summary

Andrew describes how the global economy possessed little momentum and underlying weaknesses going in to 2020 - hence we had low interest rates and large budget deficits, in particular large corporate deficits in many Emerging Markets, as well as in the US and UK. Following COVID, policymakers have suspended the market system as the system has moved to a ‘total war’ economy. Now equity markets have utility and they are a gauge of fear of the virus versus fear of missing out in the rally. In the near term, Andrew expects the FOMO rally to continue as the virus appears to ebb, but expects a second wave of infections late summer and markets to have to confront just what the world may look like after COVID. He discussed the four stages of economic response to the global recession / depression. Stage One - saving the banking system - is completed but Stage Two, in which funds need to be transferred from the banking system in to the real economy has not been completed and is challenging, thereby raising the risk of a further contraction in GDP. Stage Three involves restarting the global credit system and in particular easing China’s balance of payments constraints but this too has yet to be done. Given these failures, Andrew expects any post lock down economic recovery to be limited and stagflationary. Finally, Stage Four will involve an MMT experiment to restart the global system, but this too may prove inflationary over the long term and in some countries, Italy and Spain, capital controls may need to be introduced to maintain currency and financial stability during this phase. Following the crisis, Andrew believes countries will retreat to isolationist policies, onshoring or shortening supply chains. Ultimately, we will see higher taxes in the corporate sector and wealth taxes as governments seek to close their deficits. Andrew expects that the distribution of cash by companies to shareholders will fall sharply relative to GDP over the coming years, thereby marking the end of the Zaitech Bubble.

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