Mega-threats, poly-crises, and the "confluence of calamities"

 

Call it what you may, mega-threats, poly-crises, or a "confluence of calamities", it is all the same. We are facing interconnected risk events that may lead to greater potential market downturns. These are the new risk buzzwords, but all macro risks have usually been a combination of events that create global shocks and not just one-off events. For example,

• The GFC was a global problem because of the global savings glut that moved too much capital into the US housing market.
• Oil shocks are closely tied to geopolitical crises and wars and not an inability to find oil.
• Pandemics are worldwide problems given globalization and travel. Solving a pandemic has economic consequences.
• The growth in China is exacerbated given political ambitions which limit policy coordination.

What makes the current environment different is debt and inflation. Inflation constrains policy choices. Debt constrains policy choices. In a constrained world, a simple crisis may not be solved with creating another crisis. Risks increase because response choices decrease.  

Rethinking Adam Smith - More than the "invisible hand"

As soon as you say the name Adam Smith, the first thoughts for many include "invisible hand" and "capitalism". The Adam Smith that most people think they know is one-dimensional. Perhaps that is inevitable for many thinkers. We tag them with a single word or view. We often don't like multi-dimensional thinkers. We like simple descriptions. Have many revered Smith without understand his writings? Yes, and this should be rectified.

The new book Adam Smith's America tries to find a balance between a one-dimensional Adam Smith and the complexities of a man who was a moral philosopher. Glory Liu present different interpretations of Smith through time and tries to link the Adam Smith of The Wealth of Nations with the Smith of The Theory of Moral Sentiments. Liu weaves a history of how the Adam Smith after his publication in 1776 differed from the interpretation in 1876 and again in 1976. She asks and presents a more balanced view of Smith albeit he introduces her own biases. 

Liu would like to emphasize that Smith was not an economist but a moral philosopher; however, had he only wrote Moral Sentiments, he would have been an unknown and only viewed in passing. Moral thinking shaped the Wealth of Nations, but it is not a work of philosophy. Economists especially from the Chicago School focus not on his moral thinking but his description of market behavior. Yes, they were biased, but they try and wed Smith with economics, price theory, and a view of capital as a system. There is not an attempt to fit this into a deeper philosophical view. 

Rethinking Adam Smith could have been condensed with less emphasis on the bias against the Chicago school. It is a useful to read about the changing interpretations of Smith, but that is a not a unique problem. It is just part of field of history that interpretations change with the times. Refocusing on Smith the philosopher does not change his key focus on market dynamics. 

Sector behavior and inflation regimes - A regime switch is happening

2022 was the year that investors had to tilt sector exposures to take advantage of higher inflation, but 2023 seems to be setting up for something different. With inflation falling, the switch must be toward those sectors that will do well during an inflation slowdown. Macro factor tilts can be just as important as factor tilts for asset allocation. 

The important sector tilts should be based on macro environment; what is growth and what is inflation. The important part is that these must be looked at in tandem. Are we in a slow growth with high inflation or slow growth with falling inflation there is a big difference. Regime identification can help with this process. Declining inflation with slow growth, not a recession, looks to be the environment for 2023 not rising inflation and a recession. The latest unemployment number will create further doubt that a recession is imminent. The inflation reversals suggests that the worst of the inflation shock is behind us.

The following is from some UBS research.

 

The difference between economics and politics

 

the old joke -

"The first law of economics is, scarcity is real; the first law of politics is, ignore the first law of economics." 

from George Will 

It used to be that economics and politics were closely intertwined. There were departments of political economy not economics departments. Economics developed from those studying philosophy like Adam Smith. 

Nevertheless, the joke focuses on some fundamental differences. Economics is often worried about what is the size of the pie while politics is focused on how we get slices with the promise that all slices will be bigger. Economics focuses on how pries are used to solve the scarcity problem while transactional politics is focused on promises today that may not be kept in the future. 

This funny truism suggests that tempering politics and economics is important. For politics, it is learning to control through constraints. For economics, it is loosening controls through productivity and technology.