One of the (very few) perks from the pandemic is that it’s been easier to catch up with friends abroad.
People have more time on their hands, and we’ve had a chance to have longer and more frequent chats instead of the occasional hurried Facebook or WhatsApp message.
And lately, something has been a real standout during our conversations. While Australia is still in lockdown mode, many other parts of the world are very much in ‘pandexit’ mode.
I’ve noticed during conversations that friends abroad are using expressions like ‘this post-pandemic world’ and ‘pandemic aftermath’ more often, as if we’ve already reached the other side of the tunnel.
I mean in Europe, things are looking up. Summer has arrived, lockdowns are ending, and masks are off.
Is it all over? I’m not that sure yet.
But in the economic world, the Bank of International Settlements (BIS) is also talking about ‘pandexit’. If you’re not familiar with the BIS, it’s the bank of central banks.
But before we get into that, let’s do a quick recap of what we’ve seen so far.
The aftermath of 2008 included lowering interest rates to record lows, and central bank policies like quantitative easing. Money flowed into assets like the stock market and property. The US Federal Reserve tried to go back to normal by tapering stimulus to prepare for the next crisis but had to quickly backtrack after markets went a little haywire.
And then a true out of left field crisis hit, the pandemic. People were locked in, and we saw even more unprecedented stimulus just to keep things going.
Central banks lowered interest rates even more, expanded their balance sheets, and insured credit flowed to avoid bankruptcies. Usually in a crisis, liquidity and access to lending are one of the first things to disappear. But this time they didn’t.
Asset prices soared, even with the pandemic. I mean, a house in my neighbourhood recently sold at a little over a million, close to double what it went for in 2015. With lockdowns and fiscal stimulus, some households saw their savings and spending money increase. At the same time, we’ve had plenty of speculation.
There’s been a sort of recovery — one not caused by real growth, but central banks.
We’ve seen some concerning signs of inflation more recently in things like commodities. The US Fed says this is transitory. That it’s happening off the back of countries stashing up, supply disruptions, and higher shipping costs.
So, the main two questions are: Is this inflation really transitory? And how do we scale back all this unconventional stimulus and get back to normal?
Because let me tell you, having all this money around during a crisis isn’t normal.
It’s why I read with great interest as the BIS touched on the challenges central banks are facing during the ‘pandexit’.
The BIS touched on two different possible scenarios.
In one, we get an inflation surprise. Households that have built up their savings during the pandemic start spending faster than expected, driving up growth and forcing central banks to tighten conditions.
Of course, all this opens its own can of worms. Many governments (such as the US) are running high debt, and this would mean spending more on interest repayments.
And inflation feeds on inflation. If people see inflation increasing higher than estimated, they may expect it to continue in the future. Things like property and stock prices could take a hit, and it would affect growth.
It also decreases confidence, and as I’ve written in these pages before, our whole system is based on confidence.
The other scenario is even less desirable. The pandemic takes a turn for the worst, and the recovery stalls.
Remember, this is the largest global vaccination campaign in history. Things may not go to plan. We could see more COVID strains pop up, and more lockdowns — which would likely require more stimulus from central banks to continue this ‘normal’.
Best-case scenario? We leave the pandemic behind. This higher inflation is transitory, and things move slow. We are able to keep interest rates low while stimulating growth. It gives us time to reduce stimulus, raise taxes, and increase interest rates back to positive.
But this ‘just right’ scenario walks a very tight rope.
It’s all looking very uncertain at the moment.
In my mind, there’s one thing that could do quite well during the pandexit. Gold.
Gold does well during uncertainty, and when real interest rates are negative.
If you’re interested in investing in gold, my colleague Brian Chu thinks Australia could be at the centre of the next gold bull market. To find out more about it, click here.
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PS: Selva is also the Editor of New Energy Investor, a newsletter that looks for opportunities in the energy transition. For information on how to subscribe, click here.