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Yahoo
4 days ago
- Business
- Yahoo
Legendary Wall Street forecaster Bob Doll is having his best year
Legendary Wall Street forecaster Bob Doll is having his best year originally appeared on TheStreet. Stock market prognosticators are wrong so frequently that observers can rightly wonder if they're making forecasts using the oldest soothsaying methods, drawing pebbles from a pile, dropping hot wax into water, using random dots on paper or, of course, trying to find something magical in numbers. Yet at the start of every year – and again at the midpoint – countless market watchers take their crack at divining the future, mixing educated conjecture, informed hunches and the occasional WAG (wild-ass guess).Measured just about any way possible, most of those projections are wrong. CXO Advisory Group analyzed more than 6,500 forecasts—using methodologies ranging from fundamental to technical analysis—made by 68 experts on the U.S. stock market from 2005 through 2012. The investigation found that the accuracy of the forecasts was below 47% on average. That loses to a coin flip. From Black Monday star to today's afterthought Bad calls tend to be forgotten quickly, as soon as a forecast is updated based on new information. Winning picks are lionized and celebrated, even though the expert may have less staying power than a bull market rally. Wall Streeters sometimes call the tendency to place too much trust in a guru who made the most recent good call the 'Elaine Garzarelli Effect.' Garzarelli made her reputation as a Lehman Brothers investment strategist by urging clients to get out of the stock market the week before the Black Monday crash in 1987. That call made her one of the most widely quoted strategists on the Street, but it was also the pinnacle of her success. Whether it was brilliant prescience or dumb luck may be argued forever, but she never really duplicated that success. Garzarelli failed to generate much interest when she tried running mutual funds and a call on stocks being 25% undervalued late in 2007 as the global financial crisis was looming, further dimmed her star. While old-timers remember her name – she runs Garzarelli Research and her newsletter suggests that she is currently bullish on small- and mid-caps plus transportation stocks – she is like many one-time stars, known more for one right call than for being right consistently over years or decades. Bob Doll's forecast record beats coin flips, by a lot One Wall Street analyst who hasn't shied away from forecasts -- and has a stellar track record -- is Bob Doll, chief executive and investment officer at Crossmark Global Investors. In a 40-plus-year career, Doll has also been the top equity strategist at Blackrock, Nuveen, Merrill Lynch, and Oppenheimer Funds; at each of those stops, Doll—a regular guest on CNBC, Fox Business, and seemingly all financial media outlets—has started each year with 10 forecasts for the coming 12 holds his picks up to a grader each year and historically has been right 72% of the time. That's roughly where he stood with his 2024 prognostications. He has said that his best years ever put him at just above 80%. Entering 2025, Doll was expecting 'fewer tailwinds, but more tail risks.' His picks reflected that, calling for 'some bumps in the road, but some good news and probably more volatility,' in an interview on Money Life with Chuck Jaffe that aired in January. Now, seven months later, Doll is getting the results he expected. Eight of Doll's 10 picks tend to be tied to the economy and stock market, with one tied to politics and a wildcard. This is what Doll was calling for entering 2025, and how it's turning out: Slower economic growth as unemployment rises past 4.5%. The jury is out on this one, but if unemployment hits Doll's target – it's currently just north of 4% -- mark this as a win. Sticky inflation that stays above Fed's 2% target, causing the central bank to cut rates less than expected. Barring a Fed surprise, this one's on track.10-year Treasury yields primarily between 4% and 5% with wider credit spreads. The 10-year Treasury has spent the year in that range; credit spreads were up around the tariff tantrum but have narrowed since. But if there's an economic slowdown, they will widen and this one will be a winner. Earnings fail to achieve the market's consensus 14% expectation entering the year, and yet every sector has up earnings. This forecast is virtually a lock at this point, even with Doll expecting a second-half slowdown that could hurt some sectors. Equity volatility rises, with the VIX average approaching 20. The VIX averaged 18.5 in the first quarter and 24.4 in the second, so this call –and the VIX has only been this high in two of the last 13 calendar years – might have seemed like a longshot but now looks like a sure shot. Stocks experience a 10% correction and price/earnings ratios contract. The correction went on the books in April, and P/E ratios are down and appear likely to stay that way. This can be marked in the win column. Equal-weighted portfolios beat cap-weighted portfolios and value beats growth. Both of these conditions are true at the moment; the question is whether that will hold up through December. Financials, energy and consumer staples outperform healthcare, technology and industrials. This looked like a sure thing into June, when the margin of outperformance shrank. If financials weaken, it could put this one in jeopardy; barring that, it looks like another win. 'Congress passes the Trump tax cut extension, reduces regulation, but tariffs and deportation are less than expected.' The tariff forecast here is the one thing where Doll looks like he's wrong and won't recover; by year's end, this one is likely to look half-right, making it the one clear blemish that's efforts make progress but fall far short of $2 trillion in annualized savings. Even Doll acknowledges that this was a softball. In a July 22 interview on Money Life with Chuck Jaffe, Doll acknowledged that he now expects to be right at least 70 percent of the time, 'but I wish coming into the year we knew which seven we were going to get right. We could make a lot of money. The problem is you don't know which ones you're going to get right and wrong.' What Bob Doll think happens for the rest of 2025 As for the rest of 2025, Doll gave three quick assessments for where things stand now: "One, the economy is slowing. We just don't know how much it's going to slow. Two, we're beginning to see tariffs show up in the inflation numbers. We don't know how much. And number three we have this tailwind called [artificial intelligence] which is real and is keeping things moving." Further, Doll said he expects the AI play to broaden out. The tailwind called AI has also been particularly strong at the high end of the market. We all were expecting some measure of breadth this year. Are we going to see the breadth show up at some point? Yeah. Well, it obviously occurred in the first quarter, and then it went away in the second quarter. While Doll noted that tariffs seem to be showing up in slight increases in the Consumer Price Index, or CPI, he did not think they would cause a spike in inflation over the rest of the year. "I don't think [the impact of tariffs on inflation] it's going to be horrible," he said. "It's just going to be there. Remember, only 15% approximately of our GDP is from outside the United States. The other 85 is pretty domestic. So it's limited by how much of the economy it really affects. "Now, having said that, remember the Fed saying 'We've got to get inflation down to 2% and they're struggling at 3% and we're not going to get to 2%. And that means all these people who want the Fed to lower rates are going to have to wait a little bit longer."Legendary Wall Street forecaster Bob Doll is having his best year first appeared on TheStreet on Jul 27, 2025 This story was originally reported by TheStreet on Jul 27, 2025, where it first appeared.
Bloomberg
22-07-2025
- Business
- Bloomberg
Private Equity's Vast Middle Suffers in Search for Fresh Funds
After it emerged from the rubble of Lehman Brothers, Trilantic Capital Partners exemplified the success of private equity's vast middle market for more than a decade. Profitable bets on energy companies and consumer names like Traeger Pellet Grills bolstered its reputation as low interest rates fueled a boom across the industry. In 2019, investor appetite was so plentiful that Trilantic hit the upper limit of money it was willing to accept for the sixth iteration of its flagship fund.
Hindustan Times
16-07-2025
- Business
- Hindustan Times
How the economy evades every crisis
After Adolf Hitler's troops rolled into France in 1940, many feared the imminent destruction of Europe and its economy. British investors did not. In the year following the invasion, London's stockmarket rose; indeed, by the end of hostilities, British companies had delivered real returns to shareholders of 100%. The plucky investors must have seemed mad at the time, but they were proved right and made handsome profits. The world economy appears impressively and increasingly shock-absorbent. Supply chains in goods—widely believed to be a source of fragility—have shown themselves to be resilient. A more diverse supply of energy, and a less fossil-fuel-intensive economy, have reduced the impact of changes in the oil price. And across the world, economic policymaking has improved. According to the conventional narrative, the great moderation, a period of steady growth and predictable policymaking, ran from the late 1980s to the global financial crisis of 2007-09. But perhaps it did not die alongside Lehman Brothers. According to IMF data, this year just 5% of countries are on track for a recession, the least since 2007. Unemployment in the OECD club of rich countries is below 5% and close to a record low. In the first quarter of 2025 global corporate earnings rose by 7% year on year. Emerging markets, long prone to capital flight in times of trouble, now tend to avoid currency or debt crises (see chart 3). Consumers across the world, despite claiming to be down in the dumps, spend freely. On almost any measure, the economy is basically fine. Chart 3 Little wonder that investors are optimistic. Over the past 15 years, as the polycrisis has built, American stocks have marched upwards. More than half the rich world's stockmarkets are within 5% of their all-time high. Wall Street's fear gauge, the VIX, an index of stockmarket volatility, is running below its long-term average. Markets fell in April, when Mr Trump announced his 'Liberation Day' tariffs, but quickly recouped their losses. Many investors now follow a simple rule when markets decline: 'Buy the dip.' They do not even seem to worry much about companies at the sharp end of geopolitical risk. American businesses especially exposed to tariffs, such as sporting-goods firms, are only mildly underperforming the broader market. When Vladimir Putin launched his war in 2022, Ukraine's stockmarket collapsed. It has since made up ground, rising by a quarter this year. Nowhere is there a starker contrast between pundits and markets than Taiwan. Goldman Sachs, a bank, produces two indices of 'cross-strait' risks. According to the index built using newspaper articles, the strait has rarely been so dangerous. By contrast, the market-based index, derived from share prices, hardly seems bothered (see chart 4). Either investors are naive—or, as in 1940, they have a more sophisticated intuition of how a conflict would play out. Chart 4 So there is a puzzle: chaotic geopolitics and a decidedly placid economy. This may mirror events in 1940, but it is unusual historically. Typically economists find a link between geopolitical ructions and a worsening economy. A paper by Dario Caldara and Matteo Iacoviello, both of the Federal Reserve, suggest that higher geopolitical risk 'foreshadows' lower investment and employment. Hites Ahir and Davide Furceri of the IMF and Nicholas Bloom of Stanford University find that increases in uncertainty tend to be followed by 'significant declines in output'. Perhaps something has changed. Mr Ahir and his colleagues present evidence suggesting so. Since 1990 uncertainty has hurt growth less than before. Recent developments hint at further progress. Out of the fire The emergence of a new form of capitalism—call it the teflon economy—may be behind these shifts. On one side of the equation, firms are better than ever at dealing with shocks, meaning that markets continue to function even at a time when politics breaks down. On the other side, governments offer their economies unprecedented levels of protection. Start with supply chains, which have received a number of shocks in recent years. The conventional narrative that they are prone to 'failure' is largely wrong. During the pandemic some commodities became a lot more expensive—but this was a consequence of an enormous surge in demand, rather than falling supply. Semiconductors are a classic example. In 2021 chipmakers shipped 1.2trn units, some 15% more than the year before. The industry did not really suffer a 'supply crunch'. Rather, it responded efficiently to an extreme surge in demand. According to the New York Fed's supply-chain pressure index, bottlenecks have remained in line with the long-run average, even in the face of Mr Trump's trade war. We find similar results in our analysis of 33,000 commodities that America imported from 1989 to 2024. For each year, we counted the number where imports declined from the previous year by more than 20%, even as the price of those imports rose by more than 20% This hints at situations where a supply chain genuinely 'fails'. We calculate that the failure rate has been trending down over time. Modern supply chains are resilient because they are professionally run. Specialised logistics firms have global reach, with cutting-edge warehousing and transport capabilities. Better communications enable rerouting when required. Lots of people have jobs that in effect amount to finding the most marginal of marginal gains. In America there are 95% more supply-chain managers than two decades ago. Some investors believe structural changes to the economy are also playing a part. 'A services economy is incredibly consistent,' says Rick Rieder, chief investment officer for fixed-income markets at BlackRock, the world's largest asset manager. 'They really do not go into recession except when there is a real major shock: a pandemic or a financial crisis.' Since 1990, goods consumption in America has fallen on a quarter-on-quarter basis in 27 quarters. Spending on services, by contrast, has contracted in only 5 quarters. Fast growth in American shale oil and gas production has made the world less dependent on both Russia and the Middle East, as became apparent after Mr Putin's invasion of Ukraine, which failed to produce the deep recession in Europe that had been expected by many analysts. OPEC produced fewer than 33m barrels of oil a day last year, just 12% more than in 1973, when the cartel curtailed production and sent prices rocketing. At the same time, the rest of the world produced 64m barrels of oil a day, a figure that has more than doubled since the oil shock of the 1970s. Moreover, the global economy is becoming less dependent on the fuel: oil intensity, defined as the amount consumed per unit of GDP, has dropped by around 60% since 1973 (see chart 5). Hence why events such as the recent Israeli and American bombing of Iran barely dent the price of crude. How-the-economy-evades-every-crisis Excellent as supply-chain agility may be, it would matter less if consumer demand crashed every time sentiment soured. That does not happen, in large part because of government action. Politicians in the rich world have become extreme fiscal activists. During the pandemic, they spent over 10% of GDP on rescue packages. In 2022, during the energy crisis, the average European government spent another 3% of GDP. In 2023, in the middle of a banking scare, America hugely expanded its deposit insurance. When there is bad news, politicians are quick to spend big. And even when there is no bad news, politicians spend big just to be sure. The average rich-country government now runs a fiscal deficit of over 4% of GDP, far above the norm in the 1990s and 2000s. Their support goes beyond budget deficits, which are simple to measure. Many countries now have vast 'contingent liabilities'—off-balance-sheet commitments that nonetheless represent an enormous potential outlay. America's federal government is on the hook for contingent liabilities worth more than five times the country's GDP. When the feds are backstopping the entire economy, it is hardly surprising that recessions are few and far between. This approach has clear benefits. Is it not better to live in a world where joblessness rarely spikes? Even during the pandemic the OECD's unemployment rate never exceeded 7%. Losing a job can scar someone for life; avoiding that fate boosts incomes and health. Persistently high asset prices, meanwhile, are good for anyone with a retirement account or stock portfolio. However, the system also has costs. If central banks and governments succeed in postponing financial crashes, they will simply encourage more reckless behaviour, sowing the seeds of a deep downturn. Emerging markets have made progress, too. Flexible exchange rates are more common; policymakers are better at avoiding shocks. From 2000 to 2022, the number of emerging-market central banks targeting inflation rose from five to 34, as Gita Gopinath of the IMF has noted. Local bond markets are more established, meaning poor countries can borrow in their own currency at respectable rates, leaving them less exposed to global fluctuations. Even the combination of a pandemic, surging commodity prices and rising American interest rates did not derail developing economies. As a share of emerging-market GDP, excluding China, sovereign debt in default rose to 1.2% in 2023, up from 0.6% in 2019. That pales in comparison to past crises. In 1987 the volume of emerging-market debt in default hit 11.7% of GDP. Truly troubled countries, such as Egypt and Pakistan, today avoid default. Yet, as in the rich world, this comes with costs. As China has grown as a lender and entered negotiations, restructurings have almost ground to a halt. The IMF and official creditors are reluctant to force borrowers into default, instead preferring to drip feed loans. Although few countries default, 59 were under strain in 2024 by the IMF's and World Bank's count, a record high. Many aspects of teflon capitalism are here to stay, for better or worse. Policymaking in emerging markets is unlikely to regress. China is not about to make default talks any easier. Rich countries, which are rapidly ageing, want economic security; populist politics demands it. Investors now expect rescue packages at the first sign of trouble, and will keep buying the dip. In the meantime, two risks loom. First, higher interest rates make profligacy expensive. This year America will spend over 3% of GDP on debt service, more than on defence. At some point, governments will have to cut back. Second, geopolitical shocks may yet escalate to a point where even today's robust supply chains cannot cope. A Chinese invasion of Taiwan could destroy, pretty much overnight, the West's supply of high-end semiconductors. In 1940 investors in the City wagered that Hitler's conquest of Europe would come to nothing. Investors in 2025 are making a subtler bet: that politicians, regulators and central bankers will continue to stand behind them when things go wrong. The danger is that, in the next crisis, the bill for perpetual protection could come due—and it could be steep.
West Australian
16-07-2025
- Business
- West Australian
THE ECONOMIST: The age of the Teflon Economy as world markets continue to survive every crisis
After Adolf Hitler's troops rolled into France in 1940, many feared the imminent destruction of Europe and its economy. British investors did not. In the year following the invasion, London's stockmarket rose; indeed, by the end of hostilities, British companies had delivered real returns to shareholders of 100 per cent. The plucky investors must have seemed mad at the time, but they were proved right and made handsome profits. Although today's dangers are not in the same league as a world war, they are significant. Pundits talk of a 'polycrisis' running from the COVID-19 pandemic, land war in Europe and the worst energy shock since the 1970s to stubborn inflation, banking scares, a Chinese property bust and trade war. One measure of global risk is 30 per cent higher than its long-term average. Consumer-confidence surveys suggest that households are unusually pessimistic about the state of the economy, both in America and elsewhere. Geopolitical consultants are raking it in, as Wall Street banks fork out on analysts to pontificate about developments in the Donbas or a potential Chinese invasion of Taiwan. It is, in some ways, a repeat of 1940. In the face of chaos, the global economy powers on. Since 2011 growth has continued at around 3 per cent a year. During the worst of the euro crisis in 2012? Around 3 per cent. What about 2016, the year Britain voted for Brexit and America for Donald Trump, or 2022, when Russia invaded Ukraine? Also 3 per cent. The exception was in 2020-21, during the pandemic. When governments introduced lockdowns, many feared a slump to rival the Depression. In fact, over the following two years the world economy ground out annual GDP growth of 2 per cent; one year of contraction, followed by a storming recovery. The world economy appears impressively and increasingly shock-absorbent. Supply chains in goods — widely believed to be a source of fragility — have shown themselves to be resilient. A more diverse supply of energy, and a less fossil-fuel-intensive economy, have reduced the impact of changes in the oil price. And across the world, economic policymaking has improved. According to the conventional narrative, the great moderation, a period of steady growth and predictable policymaking, ran from the late 1980s to the global financial crisis of 2007-09. But perhaps it did not die alongside Lehman Brothers. According to IMF data, this year just 5 per cent of countries are on track for a recession, the least since 2007. Unemployment in the OECD club of rich countries is below 5 per cent and close to a record low. In the first quarter of 2025 global corporate earnings rose by 7 per cent year on year. Emerging markets, long prone to capital flight in times of trouble, now tend to avoid currency or debt crises. Consumers across the world, despite claiming to be down in the dumps, spend freely. On almost any measure, the economy is basically fine. Little wonder that investors are optimistic. Over the past 15 years, as the polycrisis has built, American stocks have marched upwards. More than half the rich world's stockmarkets are within 5 per cent of their all-time high. Wall Street's fear gauge, the VIX, an index of stockmarket volatility, is running below its long-term average. Markets fell in April, when Mr Trump announced his 'Liberation Day' tariffs, but quickly recouped their losses. Many investors now follow a simple rule when markets decline: 'Buy the dip.' They do not even seem to worry much about companies at the sharp end of geopolitical risk. American businesses especially exposed to tariffs, such as sporting-goods firms, are only mildly underperforming the broader market. When Vladimir Putin launched his war in 2022, Ukraine's stockmarket collapsed. It has since made up ground, rising by a quarter this year. Nowhere is there a starker contrast between pundits and markets than Taiwan. Goldman Sachs, a bank, produces two indices of 'cross-strait' risks. According to the index built using newspaper articles, the strait has rarely been so dangerous. By contrast, the market-based index, derived from share prices, hardly seems bothered. Either investors are naive — or, as in 1940, they have a more sophisticated intuition of how a conflict would play out. So there is a puzzle: chaotic geopolitics and a decidedly placid economy. This may mirror events in 1940, but it is unusual historically. Typically economists find a link between geopolitical ructions and a worsening economy. A paper by Dario Caldara and Matteo Iacoviello, both of the Federal Reserve, suggest that higher geopolitical risk 'foreshadows' lower investment and employment. Hites Ahir and Davide Furceri of the IMF and Nicholas Bloom of Stanford University find that increases in uncertainty tend to be followed by 'significant declines in output'. Perhaps something has changed. Mr Ahir and his colleagues present evidence suggesting so. Since 1990 uncertainty has hurt growth less than before. Recent developments hint at further progress. The emergence of a new form of capitalism — call it the teflon economy — may be behind these shifts. On one side of the equation, firms are better than ever at dealing with shocks, meaning that markets continue to function even at a time when politics breaks down. On the other side, governments offer their economies unprecedented levels of protection. Start with supply chains, which have received a number of shocks in recent years. The conventional narrative that they are prone to 'failure' is largely wrong. During the pandemic some commodities became a lot more expensive — but this was a consequence of an enormous surge in demand, rather than falling supply. Semiconductors are a classic example. In 2021 chipmakers shipped 1.2 trillion units, some 15 per cent more than the year before. The industry did not really suffer a 'supply crunch'. Rather, it responded efficiently to an extreme surge in demand. According to the New York Fed's supply-chain pressure index, bottlenecks have remained in line with the long-run average, even in the face of Mr Trump's trade war. We find similar results in our analysis of 33,000 commodities that America imported from 1989 to 2024. For each year, we counted the number where imports declined from the previous year by more than 20 per cent, even as the price of those imports rose by more than 20 per cent This hints at situations where a supply chain genuinely 'fails'. We calculate that the failure rate has been trending down over time. Modern supply chains are resilient because they are professionally run. Specialised logistics firms have global reach, with cutting-edge warehousing and transport capabilities. Better communications enable rerouting when required. Lots of people have jobs that in effect amount to finding the most marginal of marginal gains. In America there are 95 per cent more supply-chain managers than two decades ago. Some investors believe structural changes to the economy are also playing a part. 'A services economy is incredibly consistent,' says Rick Rieder, chief investment officer for fixed-income markets at BlackRock, the world's largest asset manager. 'They really do not go into recession except when there is a real major shock: a pandemic or a financial crisis.' Since 1990, goods consumption in America has fallen on a quarter-on-quarter basis in 27 quarters. Spending on services, by contrast, has contracted in only 5 quarters. Fast growth in American shale oil and gas production has made the world less dependent on both Russia and the Middle East, as became apparent after Mr Putin's invasion of Ukraine, which failed to produce the deep recession in Europe that had been expected by many analysts. OPEC produced fewer than 33 million barrels of oil a day last year, just 12 per cent more than in 1973, when the cartel curtailed production and sent prices rocketing. At the same time, the rest of the world produced 64 million barrels of oil a day, a figure that has more than doubled since the oil shock of the 1970s. Moreover, the global economy is becoming less dependent on the fuel: oil intensity, defined as the amount consumed per unit of GDP, has dropped by around 60 per cent since 1973 (see chart 5). Hence why events such as the recent Israeli and American bombing of Iran barely dent the price of crude. Excellent as supply-chain agility may be, it would matter less if consumer demand crashed every time sentiment soured. That does not happen, in large part because of government action. Politicians in the rich world have become extreme fiscal activists. During the pandemic, they spent over 10 per cent of GDP on rescue packages. In 2022, during the energy crisis, the average European government spent another 3 per cent of GDP. In 2023, in the middle of a banking scare, America hugely expanded its deposit insurance. When there is bad news, politicians are quick to spend big. And even when there is no bad news, politicians spend big just to be sure. The average rich-country government now runs a fiscal deficit of over 4 per cent of GDP, far above the norm in the 1990s and 2000s. Their support goes beyond budget deficits, which are simple to measure. Many countries now have vast 'contingent liabilities' — off-balance-sheet commitments that nonetheless represent an enormous potential outlay. America's federal government is on the hook for contingent liabilities worth more than five times the country's GDP. When the feds are backstopping the entire economy, it is hardly surprising that recessions are few and far between. This approach has clear benefits. Is it not better to live in a world where joblessness rarely spikes? Even during the pandemic the OECD's unemployment rate never exceeded 7 per cent. Losing a job can scar someone for life; avoiding that fate boosts incomes and health. Persistently high asset prices, meanwhile, are good for anyone with a retirement account or stock portfolio. However, the system also has costs. If central banks and governments succeed in postponing financial crashes, they will simply encourage more reckless behaviour, sowing the seeds of a deep downturn. Emerging markets have made progress, too. Flexible exchange rates are more common; policymakers are better at avoiding shocks. From 2000 to 2022, the number of emerging-market central banks targeting inflation rose from five to 34, as Gita Gopinath of the IMF has noted. Local bond markets are more established, meaning poor countries can borrow in their own currency at respectable rates, leaving them less exposed to global fluctuations. Even the combination of a pandemic, surging commodity prices and rising American interest rates did not derail developing economies. As a share of emerging-market GDP, excluding China, sovereign debt in default rose to 1.2 per cent in 2023, up from 0.6 per cent in 2019. That pales in comparison to past crises. In 1987 the volume of emerging-market debt in default hit 11.7 per cent of GDP. Truly troubled countries, such as Egypt and Pakistan, today avoid default. Yet, as in the rich world, this comes with costs. As China has grown as a lender and entered negotiations, restructurings have almost ground to a halt. The IMF and official creditors are reluctant to force borrowers into default, instead preferring to drip feed loans. Although few countries default, 59 were under strain in 2024 by the IMF's and World Bank's count, a record high. Many aspects of teflon capitalism are here to stay, for better or worse. Policymaking in emerging markets is unlikely to regress. China is not about to make default talks any easier. Rich countries, which are rapidly ageing, want economic security; populist politics demands it. Investors now expect rescue packages at the first sign of trouble, and will keep buying the dip. In the meantime, two risks loom. First, higher interest rates make profligacy expensive. This year America will spend over 3 per cent of GDP on debt service, more than on defence. At some point, governments will have to cut back. Second, geopolitical shocks may yet escalate to a point where even today's robust supply chains cannot cope. A Chinese invasion of Taiwan could destroy, pretty much overnight, the West's supply of high-end semiconductors. In 1940 investors in the City wagered that Hitler's conquest of Europe would come to nothing. Investors in 2025 are making a subtler bet: that politicians, regulators and central bankers will continue to stand behind them when things go wrong. The danger is that, in the next crisis, the bill for perpetual protection could come due — and it could be steep.
Mint
16-07-2025
- Business
- Mint
How the economy evades every crisis
After Adolf Hitler's troops rolled into France in 1940, many feared the imminent destruction of Europe and its economy. British investors did not. In the year following the invasion, London's stockmarket rose; indeed, by the end of hostilities, British companies had delivered real returns to shareholders of 100%. The plucky investors must have seemed mad at the time, but they were proved right and made handsome profits. Although today's dangers are not in the same league as a world war, they are significant. Pundits talk of a 'polycrisis" running from the covid-19 pandemic, land war in Europe and the worst energy shock since the 1970s to stubborn inflation, banking scares, a Chinese property bust and trade war. One measure of global risk is 30% higher than its long-term average (see chart 1). consumer-confidence surveys suggest that households are unusually pessimistic about the state of the economy, both in America and elsewhere (see chart 2). Geopolitical consultants are raking it in, as Wall Street banks fork out on analysts to pontificate about developments in the Donbas or a potential Chinese invasion of Taiwan. It is, in some ways, a repeat of 1940. In the face of chaos, the global economy powers on. Since 2011 growth has continued at around 3% a year. During the worst of the euro crisis in 2012? Around 3%. What about 2016, the year Britain voted for Brexit and America for Donald Trump, or 2022, when Russia invaded Ukraine? Also 3%. The exception was in 2020-21, during the pandemic. When governments introduced lockdowns, many feared a slump to rival the Depression. In fact, over the following two years the world economy ground out annual GDP growth of 2%; one year of contraction, followed by a storming recovery. The world economy appears impressively and increasingly shock-absorbent. Supply chains in goods—widely believed to be a source of fragility—have shown themselves to be resilient. A more diverse supply of energy, and a less fossil-fuel-intensive economy, have reduced the impact of changes in the oil price. And across the world, economic policymaking has improved. According to the conventional narrative, the great moderation, a period of steady growth and predictable policymaking, ran from the late 1980s to the global financial crisis of 2007-09. But perhaps it did not die alongside Lehman Brothers. According to IMF data, this year just 5% of countries are on track for a recession, the least since 2007. Unemployment in the OECD club of rich countries is below 5% and close to a record low. In the first quarter of 2025 global corporate earnings rose by 7% year on year. Emerging markets, long prone to capital flight in times of trouble, now tend to avoid currency or debt crises (see chart 3). Consumers across the world, despite claiming to be down in the dumps, spend freely. On almost any measure, the economy is basically fine. Little wonder that investors are optimistic. Over the past 15 years, as the polycrisis has built, American stocks have marched upwards. More than half the rich world's stockmarkets are within 5% of their all-time high. Wall Street's fear gauge, the VIX, an index of stockmarket volatility, is running below its long-term average. Markets fell in April, when Mr Trump announced his 'Liberation Day" tariffs, but quickly recouped their losses. Many investors now follow a simple rule when markets decline: 'Buy the dip." They do not even seem to worry much about companies at the sharp end of geopolitical risk. American businesses especially exposed to tariffs, such as sporting-goods firms, are only mildly underperforming the broader market. When Vladimir Putin launched his war in 2022, Ukraine's stockmarket collapsed. It has since made up ground, rising by a quarter this year. Nowhere is there a starker contrast between pundits and markets than Taiwan. Goldman Sachs, a bank, produces two indices of 'cross-strait" risks. According to the index built using newspaper articles, the strait has rarely been so dangerous. By contrast, the market-based index, derived from share prices, hardly seems bothered (see chart 4). Either investors are naive—or, as in 1940, they have a more sophisticated intuition of how a conflict would play out. So there is a puzzle: chaotic geopolitics and a decidedly placid economy. This may mirror events in 1940, but it is unusual historically. Typically economists find a link between geopolitical ructions and a worsening economy. A paper by Dario Caldara and Matteo Iacoviello, both of the Federal Reserve, suggest that higher geopolitical risk 'foreshadows" lower investment and employment. Hites Ahir and Davide Furceri of the IMF and Nicholas Bloom of Stanford University find that increases in uncertainty tend to be followed by 'significant declines in output". Perhaps something has changed. Mr Ahir and his colleagues present evidence suggesting so. Since 1990 uncertainty has hurt growth less than before. Recent developments hint at further progress. Out of the fire The emergence of a new form of capitalism—call it the teflon economy—may be behind these shifts. On one side of the equation, firms are better than ever at dealing with shocks, meaning that markets continue to function even at a time when politics breaks down. On the other side, governments offer their economies unprecedented levels of protection. Start with supply chains, which have received a number of shocks in recent years. The conventional narrative that they are prone to 'failure" is largely wrong. During the pandemic some commodities became a lot more expensive—but this was a consequence of an enormous surge in demand, rather than falling supply. Semiconductors are a classic example. In 2021 chipmakers shipped 1.2trn units, some 15% more than the year before. The industry did not really suffer a 'supply crunch". Rather, it responded efficiently to an extreme surge in demand. According to the New York Fed's supply-chain pressure index, bottlenecks have remained in line with the long-run average, even in the face of Mr Trump's trade war. We find similar results in our analysis of 33,000 commodities that America imported from 1989 to 2024. For each year, we counted the number where imports declined from the previous year by more than 20%, even as the price of those imports rose by more than 20% This hints at situations where a supply chain genuinely 'fails". We calculate that the failure rate has been trending down over time. Modern supply chains are resilient because they are professionally run. Specialised logistics firms have global reach, with cutting-edge warehousing and transport capabilities. Better communications enable rerouting when required. Lots of people have jobs that in effect amount to finding the most marginal of marginal gains. In America there are 95% more supply-chain managers than two decades ago. Some investors believe structural changes to the economy are also playing a part. 'A services economy is incredibly consistent," says Rick Rieder, chief investment officer for fixed-income markets at BlackRock, the world's largest asset manager. 'They really do not go into recession except when there is a real major shock: a pandemic or a financial crisis." Since 1990, goods consumption in America has fallen on a quarter-on-quarter basis in 27 quarters. Spending on services, by contrast, has contracted in only 5 quarters. Fast growth in American shale oil and gas production has made the world less dependent on both Russia and the Middle East, as became apparent after Mr Putin's invasion of Ukraine, which failed to produce the deep recession in Europe that had been expected by many analysts. OPEC produced fewer than 33m barrels of oil a day last year, just 12% more than in 1973, when the cartel curtailed production and sent prices rocketing. At the same time, the rest of the world produced 64m barrels of oil a day, a figure that has more than doubled since the oil shock of the 1970s. Moreover, the global economy is becoming less dependent on the fuel: oil intensity, defined as the amount consumed per unit of GDP, has dropped by around 60% since 1973 (see chart 5). Hence why events such as the recent Israeli and American bombing of Iran barely dent the price of crude. Excellent as supply-chain agility may be, it would matter less if consumer demand crashed every time sentiment soured. That does not happen, in large part because of government action. Politicians in the rich world have become extreme fiscal activists. During the pandemic, they spent over 10% of GDP on rescue packages. In 2022, during the energy crisis, the average European government spent another 3% of GDP. In 2023, in the middle of a banking scare, America hugely expanded its deposit insurance. When there is bad news, politicians are quick to spend big. And even when there is no bad news, politicians spend big just to be sure. The average rich-country government now runs a fiscal deficit of over 4% of GDP, far above the norm in the 1990s and 2000s. Their support goes beyond budget deficits, which are simple to measure. Many countries now have vast 'contingent liabilities"—off-balance-sheet commitments that nonetheless represent an enormous potential outlay. America's federal government is on the hook for contingent liabilities worth more than five times the country's GDP. When the feds are backstopping the entire economy, it is hardly surprising that recessions are few and far between. This approach has clear benefits. Is it not better to live in a world where joblessness rarely spikes? Even during the pandemic the OECD's unemployment rate never exceeded 7%. Losing a job can scar someone for life; avoiding that fate boosts incomes and health. Persistently high asset prices, meanwhile, are good for anyone with a retirement account or stock portfolio. However, the system also has costs. If central banks and governments succeed in postponing financial crashes, they will simply encourage more reckless behaviour, sowing the seeds of a deep downturn. Emerging markets have made progress, too. Flexible exchange rates are more common; policymakers are better at avoiding shocks. From 2000 to 2022, the number of emerging-market central banks targeting inflation rose from five to 34, as Gita Gopinath of the IMF has noted. Local bond markets are more established, meaning poor countries can borrow in their own currency at respectable rates, leaving them less exposed to global fluctuations. Even the combination of a pandemic, surging commodity prices and rising American interest rates did not derail developing economies. As a share of emerging-market GDP, excluding China, sovereign debt in default rose to 1.2% in 2023, up from 0.6% in 2019. That pales in comparison to past crises. In 1987 the volume of emerging-market debt in default hit 11.7% of GDP. Truly troubled countries, such as Egypt and Pakistan, today avoid default. Yet, as in the rich world, this comes with costs. As China has grown as a lender and entered negotiations, restructurings have almost ground to a halt. The IMF and official creditors are reluctant to force borrowers into default, instead preferring to drip feed loans. Although few countries default, 59 were under strain in 2024 by the IMF's and World Bank's count, a record high. Many aspects of teflon capitalism are here to stay, for better or worse. Policymaking in emerging markets is unlikely to regress. China is not about to make default talks any easier. Rich countries, which are rapidly ageing, want economic security; populist politics demands it. Investors now expect rescue packages at the first sign of trouble, and will keep buying the dip. In the meantime, two risks loom. First, higher interest rates make profligacy expensive. This year America will spend over 3% of GDP on debt service, more than on defence. At some point, governments will have to cut back. Second, geopolitical shocks may yet escalate to a point where even today's robust supply chains cannot cope. A Chinese invasion of Taiwan could destroy, pretty much overnight, the West's supply of high-end semiconductors. In 1940 investors in the City wagered that Hitler's conquest of Europe would come to nothing. Investors in 2025 are making a subtler bet: that politicians, regulators and central bankers will continue to stand behind them when things go wrong. The danger is that, in the next crisis, the bill for perpetual protection could come due—and it could be steep.
