Oblivious indifference

Arcadi Espada’s weekly column is published in El Mundo on Sundays. He has a loyal following among the monotonously shrinking liberal community in Spain – “liberal” in the traditional, European sense of the word. His latest piece fits his pattern, which consists of meandering from topic to apparently unrelated topic. This week he starts with a description of the alleged panic that editors and literary prize juries would be enduring regarding the prospect of publishing or celebrating an AI-generated oeuvre. This serves as an introduction to a merciless lambasting of the poor prose and even worse editing of Gabriel García Marquez’s “The Story of a Shipwrecked Sailor.” This side note somehow leads to diving into an anecdote recounted in the second volume of the diaries of William L. Shirer of “The Rise and Fall of the Third Reich” fame.

Apparently, a war weary and exhausted Mr Shirer was finally stateside in the summer of 1945 for a well- deserved three-week vacation in Cape Cod with his family. His only ambition was to sunbathe with his daughters and read fiction. As his wife picked him up at the station, she told him that she had been listening to the end of a radio program on the U.S. dropping an atomic bomb on Japan. Shirer recalls that while he recognised this news was important, he was too tired to go into it that evening. The next morning, he realised that “now that it’s all happened, I was too slow in taking it in.” Arcadi concludes that this story is a symbol of what has happened to news. There is a possibility today that we might be witnessing the end of news, because everything is news.

Markets have become lazily slow on the uptake
While we are quite confident that we still have and will have important news, we find such oblivious indifference as described by Shirer, especially in the case of alarming or shocking news, to have become the norm rather than the exception in our days. Indeed, there are huge looming problems that do not seem to enter our daily lives or get reflected in financial markets. For that reason, many people believe they do not matter. Generally, markets seem indifferent to political developments or “Grey Rhino” class problems such as geopolitics.

However, we would point out that slowly but surely news and policies do get priced by financial markets, even if in the short run they seem to be aloof to problems that many market participants lazily dismiss as “above my pay grade.” Just think about how many people have told you over the years that shorting Japanese Government Bonds is a widow-maker trade or that western central banks would never stop buying government bonds because western Treasuries cannot afford higher yields. As we all know, Government bond yields are at multi-year or multi-decade highs, except for China’s. If we have learned anything in a four-decade long career in finance, we would point to these two lessons: problems do not age well, and shit happens when most inconvenient.

Challenge 1: Demography
In order of importance, we’ll start with the demographic challenge in industrialised economies. Working age population (conventionally 15- to 64-year-olds) is generally considered by economists to be the engine of economic output. This cohort is set to shrink or stagnate while a dependent population grows across all OECD and most BRICs economies, with the notable exception of India. The UN World Population Prospects projects growth in working age population in India through 2050 of 144 million to 1.16 billion. This is significantly smaller than the decline of 239 million workers to 745 million in China. The ever-rising dependency ratio, longer life expectancies at retirement, and unfunded pension liabilities are all a challenging backdrop for global economic growth. In other words, the ever-rising needs of a fast-growing dependent cohort will need to be paid by fewer and fewer working age citizens. Indeed, pandering to the retiree constituency is the only policy all political parties seem to be able to agree.

Challenge 2: Rule of law in the U.S.
Tied for first place is the remarkable and potentially costly emasculation of constitutional guarantees in the U.S. as the system of checks and balances is not quite up to the task of controlling President Trump’s whims. There is a noticeable expansion of executive powers as Congress has stepped back and the United States Supreme Court is ambivalent. Most recently the Supreme Court overturned Humphrey’s Executor (1935), strengthening Trump’s control over independent agencies despite statutory protections that Congress had built in. However, the SCOTUS session ending in June has been a mixed bag as Trump has lost in three of four cases. Legal scholars are split on whether “constitutional crisis” is the right term at all. The indolence of the Congress of the U.S. is most alarmingly reflected in the peace time record high fiscal deficits they rubber stamp.

This administration has also been accused of concurrently impinging on the First Amendment rights of journalists and media outlets, long considered to be the Fourth Power. Grand jury subpoenas of journalists might be unusual, but they are not unprecedented. There is the Valerie Plame leak case under Bush 43 and Obama’s Department of Justice’s crackdown on a leak resulting in the subpoena of the phone records of 20 AP reporters. However, the pace is a real outlier as within a couple months, the DOJ has subpoenaed Wall Street Journal, Washington Post and, most recently, New York Times reporters. Moreover, the Bush and Obama actions addressed genuine national security concerns; Trump’s seem to be about critical political reporting. This development is lockstep with Trump’s showbusiness approach to Government as the subpoenas are hand delivered by Federal agents at the front doors of the reporters’ homes rather than to the in-house counsel of their employers. This is taking place as the DOJ just stripped back its own internal protections set under the Biden administration in response to Trump 45’s policies.

Challenge 3: Rising cost of capital
The two leading causes of concern converge on the third which is the potential for permanent and perhaps rising real cost of capital going forward. This would be especially costly for economies needing external sources of financing. This the reason why the United States needs to cherish and protect its best-in-class rule of law, corporate governance, and innovation credentials. The funding of its persistent current account deficit is tied to the TINA – there is no alternative - status of its capital markets as the global destination for excess savings.

In this context, last week’s surprise statement by Mrs Satsuki Katayama, Japan’s Finance Minister, encouraging her country’s pension funds – including the $1.8 trillion Government Pension Investment Fund (GPIF) – to substantially increase investments in domestic financial assets might very well be the “now that it’s all happened, I was too slow in taking it in” financial moment. (Let us hope that the markets are not seized by a bout of Katayama fever which serendipitously is the acute stage of a parasitic disease first studied in the Katayama district of the Hiroshima Prefecture).