Covid: it used to be a thing.

Published: Tue 17 May 2022
Updated: Tue 22 November 2022
By steve

In Markets.

Covid hangover

The policy response to Covid was unprecedented. As pandemics go, it was relatively benign, but the fiscal response was off the scale. It seems likely that the reversal of some of these measures will kill growth (or, to be charitable, reveal that the recent spike in growth has just been pulled from the future).

We currently have terrible productivity and real returns on capital, which translate to low real long-term rates. The malinvestment that the Covid response has given rise to will surely only exacerbate this. So, long-dated real rates will be low, but maybe we will finally see credit reaching real private businesses and consumers, which will engender some positive inflation expectations and an upwards sloping yield curve at last, as well as escaping from the black hole of negative rates.

It sounds crazy to be worrying about this, but 7 or 8% inflation in the UK and US will surely take a dive if we do not support growth.

Wrap

Powell gave an interview to the WSJ. I haven’t read it. From the summaries I’ve read, he said the usual stuff: that he will do what it takes to kill the dragon of inflation but that the US economy is firing on all cylinders and there is nothing to worry about. The US market rallied, dragging every other major equity market with it. Oil fell back a bit after a few days of strong growth, but most other major commodities, including foods, rallied.

Consistent with the risk-on tone, the dollar sagged. Yields went up a bit, but US 10Y is still below 3%.

I find it hard to believe that this is the turning point.

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Sorry: Elon again.

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