What has occurred since yesterday?
Marvin Gaye and Tammi Terrell landed a hit in 1967 with their song „Ain’t no Mountain High Enough“. Also the debt mountains, which the governments pile up to finance the stimulus measures do not know any limits. According to the OECD the government debt of their member states will on average increase from ca. 109% to 137%. That is a similar level as we have now in Italy.
Also on the level of the European Union new economic programs and therefore debt is in discussion. On Thursday the Spanish foreign minister asked several fiscally conservative states (including Austria) to “act fast” to approve the proposed EU rescue packages of EUR 750 billion. The French finance minister said the same and asked that “in the next weeks” an agreement has to be achieved.
It is now certain that the whole world will have higher debt after Covid-19. The question arises who should pay for it (we have quoted already once Gus Backus)?
We believe there are three options:
- Financial repression: that is not a new development, at least in Europe. The central banks keep the interest rates low and buy government debt. Regulatory guidelines force banks, insurers and pension funds to buy government bonds, which also depresses yields. Those lower yields are forwarded to savers who share the higher debt burden with the taxpayers.
- Higher taxes: there can be many different types of new taxes. E.g. on large trans-national companies or technology firms. A digital tax was already in discussion before the pandemic.
- Slightly higher inflation: that can lead to nominally higher economic activity and debt will decrease in relation to GDP.
From our view it is in such an environment important for investors to diversify widely. That is not only limited to different asset classes (equities, bonds). It has to be diversified also over different countries and regions and different investment styles.
After three very good days in the markets, yesterday there was a small setback. US equity markets closed slightly in negative territory due to the tension between China and the USA around the new national security law in Hong Kong. Yields of investment grade government bonds decreased slightly and gold gained 0,5%.
Prognoses are no reliable indicator for future performance.