Even if Covid hits shares, we must not inflate another cheap-money bubble

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Even if Covid hits shares, we must not inflate another cheap-money bubble

The Delta variant is rattling markets. But the temptation to soothe them with quantitative easing must be resisted

A Wall Street trader:

Sun 11 Jul 2021 02.00 EDT

Falling share prices. Investors piling into the safe haven of bonds. Rising infection rates of the Delta variant of coronavirus. The events of the past week have demonstrated one thing clearly: this isn’t over yet.

A couple of months ago the way out of the crisis looked clear. Immunisation programmes were allowing developed countries to remove restrictions on activity. A pick-up in growth was expected to continue without interruption. Rising government bond yields were seen as a sign of life returning to normal.

That may well prove to be an accurate description of where the global economy is heading. It is too early to say whether the financial market wobble of past week was merely a bump in the road or something more serious. It is, though, easy to see how the situation could turn very nasty indeed.

As things stand, cases of the Delta variant are rising rapidly across western economies. The UK is several weeks ahead of the rest of the pack, but there are clear signs of a pick-up in infections in the US and across the EU.

Vaccine programmes have moved on apace since the start of the year but are incomplete in developed countries and have barely begun in poorer parts of the world. Mary Daly, the president of the San Francisco federal reserve bank, was right to warn last week against declaring premature victory in the fight against the virus. “We are not through the pandemic, we are getting through the pandemic,” she told the Financial Times.

In truth, the first half of 2021 was the easy bit. Growth rates were always going to be impressive as businesses that had been shuttered opened up again and workers returned to their old jobs. A whole host of problems have now surfaced: supply bottlenecks leading to shortages and rising inflation; the difficulty of finding jobs for people whose old jobs no longer exist; the lack of sufficient financial support for developing countries to meet the challenge of dealing with the pandemic with underpowered health systems. The G7 and the G20 will rue the failure to show global leadership if new, vaccine-resistant strains of the virus spread from poor to rich countries over the coming months.

So what happens now? Despite rising inflation rates, central banks such as the Fed, the European Central Bank and the Bank of England will be in no hurry to tighten policy. They will pay more heed to falling bond yields than to rises in the cost of living, because the latter reflect what has happened in the past and the former point to slower growth in the future. Bottlenecks are starting to ease and consumer demand has been dented by rising infection rates. Even in the absence of formal lockdowns, people will inevitably make their own assessment of the risks and turn more cautious.

Indicators of the real economy – unemployment, consumer spending and manufacturing output – are going to be closely watched by the markets for evidence that the recovery is running out of steam. When these appear, as they inevitably will, share prices will fall. Central banks will try to soothe nerves by insisting that they have no intention of raising interest rates or reversing their quantitative easing money-creation programmes.

If the past is anything to go by, this will put a floor under stock markets and boost the value of property, oil and crypto-assets such as bitcoin. If the short-term risk is of markets being rattled by a pandemic-induced slowdown in growth, the longer-term threat is of an “everything bubble” that eventually goes pop.

Carbon cuts must start at home

The UK’s carbon emissions have fallen by almost a third over the past decade, a fact that the government is quick to point out. But to date the battle to end the UK’s contribution to global heating has played out across its industrial heartlands, targeting ageing fossil fuel power plants and factories.

The next leg of the country’s journey to a net zero carbon economy will hit closer to home. The buildings in which we live, and the energy we use to keep them warm, are expected to come into focus this week with the rumoured publication of two government strategy papers.

In simple terms, the first paper aims to address the UK’s habit of using billions of cubic metres of climate-polluting gas every year to heat its draughty homes and buildings. The second aims to find a way to replace the fuels we use in heavy industry and long-distance travel with clean-burning hydrogen.

Industry insiders suspect that the Euro 2020 final on Sunday could offer an ideal opportunity for the government to release the long-awaited plans while avoiding full scrutiny of a potential climate-policy own goal.

The truth is, there are no easy answers to the difficult policy questions ahead. The most daunting of them is: who pays? The changes needed to meet the UK’s legally binding climate targets will come at a cost, and – for the first time – will reach into the hearts of British homes too.

Government must show sufficient climate ambition to avoid locking the UK into years of reliance on fossil fuels. But they must also do so in a way that does not cripple lower-income groups, still reeling from the financial toll of the pandemic. Perhaps trickier still, the plans must win the backing of the Treasury.

Many in Whitehall may be wondering whether it’s not too late to ask Gareth Southgate to give them a hand.

Asset managers working for the few, not the many

In the run-up to the 2017 election, the then Labour leader Jeremy Corbyn and prominent Tory Michael Gove agreed on one thing: that capitalism was increasingly rigged in favour of big corporations.

The left-of-centre thinktank Common Wealth says that a trend in the corporate sector is being matched by a concentration of investment management groups.

These are the businesses that own and manage shares in companies on behalf of their investors, whether they be pension funds, state-owned sovereign wealth funds, or individual savers.

The thinktank’s research found that although the total share of FTSE 350 companies controlled by the 10 largest investment managers has remained relatively stable at approximately 20% over the past 20 years, the level of control within this group has become substantially more concentrated.

Britain’s investment industry plays a shrinking role. These days it is the giant US groups BlackRock and Vanguard that together control 10% of the top 350 firms.

This shift matters, because if a government wants to push forward with reforms to corporate behaviour through shareholder pressure, the success of its policy depends on persuading just a handful of US investment groups.

Is there a link between the rise of the monopolistic investment manager and the pressure on listed companies to dispense increasing amounts of profit to shareholders?

The Common Wealth report shows how productive investment in new technologies and equipment has declined, while shareholder payouts as a proportion of profits have risen substantially, with dividends reaching nearly 80% of pre-tax profits at the end of 2020.

If the left and right of the political spectrum agree that something is rotten at the core of the capitalist project once corporate monopolies start sacrificing much-needed investment for short-term cash, then there must be a case for reform.

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