Episode length 25:45
April 18, 2022
Rising energy and commodity prices, geopolitical tensions, de-globalization, a big pivot in monetary policy. Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank, explores these and other important global shifts in the first episode of this two-part podcast.
The big shift: New market forces and ways to prepare, part 1
The Merrill Perspectives Podcast
The big shift: New market forces and ways to prepare: Part 1
Chief Investment Officer,
Merrill and Bank of America Private Bank
President of Eurasia Group and GZERO Media
And Michael Hartnett,
Chief Investment Strategist,
BofA Global Research
Please see important information at the end of this program. Recorded on 3/21/2022.
War in Ukraine, rising energy and commodity prices, the move toward de-globalization, climate change. These are just some of the big shifts happening around the world. And they have important implications for our financial lives, including how we invest.
So how can investors navigate what could be a very different market environment ahead?
Hello and welcome to this edition of the Merrill Perspectives podcast. I’m Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank.
This podcast is an audio version of a webcast I hosted called “The big shift: New market forces and ways to prepare.” It’s all about the major changes we’re seeing in the economy and the markets – and steps investors could take from here.
We’re bringing you the podcast in two parts:
Here in part one, we explore the forces driving change around the world.
Up first, I speak with Ian Bremmer, President of Eurasia Group and GZERO Media about the major geopolitical events and trends he’s watching, including the crisis in Ukraine; as well as China, the U.S. dollar and climate change.
Then, I’m joined by Michael Hartnett, Chief Investment Strategist at BofA Global Research. He explains why he thinks we’ve entered a “new era” for the global economy and financial markets, and what that could mean for U.S. and global equities. And he offers four key investment themes for the future.
Be sure to listen to part two, where my guests and I explore the big shifts we’re seeing in the U.S. economy and markets and offer portfolio insights and ideas you could consider now.
You can also watch the webcast version of this program on ml.com.
With that, let’s go to my conversation with Ian Bremmer.
I want to go through a little bit of the major pivots that have been going on. Monetary policy, major pivot, we've also seen fiscal policy outlays. But more importantly, the bigger shift that you've talked about going on for a long time is this movement and acceleration towards a G-zero world and that is being expanding right now because of the crisis in Ukraine.
Take us through that power vacuum world over the next few years with China on the stage, the U.S. on the stage, Europe and then the Middle East.
Putin invaded Ukraine because he saw the G-zero; because, you know, he saw that the United States pulled out of Afghanistan. Syria, the first invasion of Ukraine, the first invasion of Georgia, Libya, Myanmar, Venezuela, Haiti. Why is that happening? It's because the United States, the most powerful country in the world does not want to be the world's policeman. Does not want to be the architect of global free trade.
Now it turned out that the Russian invasion was a step too far and has brought the Americans and the Europeans together in ways that no one would've expected. But do we think that's going to last? And do we think that that will be applicable beyond Ukraine in other parts of the world? And most countries would say, “No.” Certainly the Middle East governments would say, “No.” Certainly the Chinese would say, “No.”
The alignment with the United States is with core allies among advanced industrial democracies. It's not with the soon-to-be largest economy in the world, China, it's not with American allies in the Gulf States. It's not with the developing world, India, 1.4 billion people. So what we are seeing is not that the United States and China are suddenly fighting each other tooth and nail, but rather we're seeing an absence of global leadership. A vacuum in an environment where there are big global challenges.
With that potentially comes de-globalization. It's been widely talked about. Regional alliances with trade, perhaps labor, but most importantly right now, with where energy is, in the context of energy supply and access to natural resources. Take us through your thoughts on how that is a big shift.
Well, Russia for the last 20 years has been an energy superpower in Europe. That's over, going forward. And the reason for it is because of globalization. It's the big, cheap regional market, so that's who you buy from, if you don't care about politics. If you don't care about the disruption that can come from a geopolitical risk to yourself. Suddenly you do.
And so, what does that mean? That means that globalization starts to get unwound. I mean, oligarchs, billionaires from Russia, can they go anywhere they want and spend their money? In a globalized world, the answer is yes. In a non-globalized world, even countries like Switzerland and Monaco say, “No.” These are neutral places that suddenly are saying, “No, politics actually does matter.” This is a step too far.
And so, I would say what we have is a shift in trajectory of globalization that is increasing costs, it's fragmenting at the margins. It's certainly in areas of national security saying, okay, those are going to become larger and internal or with allies.
But the most important trend of globalization in the past 50 years has been bringing China into the global economy. That is not over. It is at risk and if it turns out that the Chinese are full in with the Russians, irrespective of the Americans and others telling them, “don't you do this,” we could then have a breach. That's a risk, but it's not where we are today. And frankly, I am reasonably optimistic, even though I don't have strong conviction about it, that we will continue on that path for the foreseeable future.
There's a lot of talk now about the dollar’s reserve status over the next, let's just say five - 10 years. Is there a viable alternative right now, even though many people are talking about this very large economy, soon to be the largest, in China and how that may compete with the dollar? Take us through your thoughts there.
As long as the Chinese economy is closed and as long as the RMB is not free floating, then the answer is no, there's not one major viable alternative. Now, the Chinese could decide that they were going to open it up, but they'd have to deal with massive capital outflows as a consequence for years, because a lot of the Chinese people holding that RMB would be much more comfortable in much more sustainable currencies like the dollar, right? So that's why they're not doing it. So it's precisely the fact that there isn't a viable alternative and the Chinese get it that kind of ensures that that continues to be true.
So I think if you told me a 30 year time horizon life looks very different. You asked me a five year time horizon, where states are the principle actors on the global stage. In that environment, yeah, I still think the dollar is the global reserve currency.
Now 10, 20, 30 years out, we could be moving into an environment where actually states increasingly aren't the primary actor on the global stage. Where, for example, technology companies could become that. Now that happens, the erosion of the U.S. dollar has the potential to be much greater in ways that people haven't been thinking about, but we aren't there.
The world to your point is becoming more digital, right? From the standpoint of almost everything we do. You've talked about recently this concept of a “techno-polar world.” Switching to now the technology end of things. Take us through your thoughts on that concept.
So, you asked me at the opening about the G-zero world. And that means that geopolitically, you used to be bipolar, U.S. versus Soviet, cold war. Then for a brief moment, you’re unipolar, the United States and its allies after the Soviets collapse and now, increasingly, you’re nonpolar. Nobody is the global leader out there, even though the U.S. is the most powerful.
And that is true when you talk about the world of physical things. You talk about commodities, you talk about physical people, talk about land, talk about aircraft carriers, all that kind of stuff. But now what happens when we talk about the digital world, the virtual world, the virtual economy data, right? That kind of information, which has economic importance also has security importance. The sanctity, the protection of your data, personally, your companies, your government.
Well, in the digital world, governments are not sovereign. Technology companies are. They actually create the platforms, they make the algorithms, they determine the security, they determine whether you're even able to be on or off of the platform and that is not a non-polar world. It's a techno-polar world. That wouldn't matter much if the digital world was just a hobby, if it was the internet that, you know, you’re just playing on.
But, when the digital world become is critical for national security, when it becomes critical for the global economy, when it becomes critical for how you live your life and your political views and how you get information, suddenly the power of those tech companies and what they're interested in accomplishing and are they aligned with governments or not, or do they even think governments are very relevant for them going forward, suddenly becomes absolutely critical. What we see is that our lives and the way we even think geopolitically are being shaped by companies that are making those determinations functionally outside of the rule of law.
Another major force in addition to a techno-polar world is climate. We're seeing stories every day, every week and we're also seeing how difficult it is to transition from a hydrocarbon productive world in the energy space, to a greener technology and in the timeline that we're trying to do it.
What's your thoughts on the climate end of things, as it relates to not just technology, but the access, and then where do we go in terms of national security in the climate end of things?
So, the interesting thing and very aligned with what we were just talking about is that the reason that we are making a transition on climate has more to do with non-state actors than it does with just big governments. I mean, we now know that by 2045, a majority of the world's energy will largely come, will likely come from non-carbon. That's incredible. And five years ago, no one would've assumed you you'd move that quickly.
But that's happening despite the fact that the central government in the United States and the central government in China, the two largest carbon producers, by the way, in the world, carbon emitters in the world, are not doing most of the leading. The Europeans are doing a lot of leading, but frankly, so are the banks. So are a lot of corporations. So are a lot of young people around the world who are saying, “We aren't going to buy your products unless you change your views on carbon.”
The COP26 summit in Glasgow was by all accounts, an outperformer. It was more successful than people would've thought because there are plenty of actors that are not the G2, that are driving response to one of the most important crises, global crises in the world today. It's a global problem. We don't have global leadership and yet there is leadership. People find a way when things are critical to respond outside of existing broken architecture.
So one final question here. Crisis times, whether it's financial crisis, humanitarian crisis, wars, conflicts, etcetera, have a way to galvanize a community, galvanize a world. In your opinion, over these next five, 10 years, as all of these shifts are still taking place, does the world become more of a galvanized end of things, around innovation to help with the future versus try to gain power of the future? Take us through your thoughts there.
I think that there will be much greater, unexpected leadership as a consequence of all of this. So I'll give you an example. 10 years ago, Europe almost fell apart. Go ahead to 2022, you now have the Europeans leading the world on climate regulations, leading the world, in some ways that Silicon Valley doesn't like on data and privacy regulations. And leading the world in the response to the Russian invasion of Ukraine.
That's interesting. Why are you seeing that? Cause they have to. Because they recognize that the way that they have lived for the last 30 years was inadequate and unacceptable to the challenges that they're increasingly facing. So, I think you will see an incredible galvanization of people all over the world in responding to these crises, but it may not be from the places that you would traditionally expect.
Ian, as always thank you for being here today.
Great to be with you.
Let’s go now to my conversation with Michael Hartnett for his perspective on global markets.
Michael. Thanks for joining me today.
We just heard from Ian Bremmer discuss the entire geopolitical scene. Let's put things in perspective right now. You've long talked about commodities being a diversifying element at this part of the cycle in a portfolio. But you also talked about a higher inflationary backdrop. And you talked about this movement of re-globalization, regional alliances, and we're seeing that play out in front of our eyes.
Give us your view on the global financial market landscape right now as we work ourselves through 2022.
Well, I think 2022 is year two of a new era, quite frankly. I think that we've lived for 40 years with lower inflation, lower interest rates, higher profit margins. And it's been a wonderful, wonderful world to be in if you own equities or corporate bonds. I think that that era has come to an end. It's come to an end partly because COVID really represented, sad as it was as a pandemic, the real climax of monetary stimulus and all that that meant so far as asset returns are concerned.
And I think what it also meant is it was the turning point for inflation. And you're mentioning things that also contribute to that turning point, the shift from globalization, which we've enjoyed for the past 30, 40 years to one of more regionalism, little bit more geopolitical isolationism dare I say. And other things that will contribute to that are things like the fight against inequality, fiscal stimulus and so on and so forth.
So I think looking forward, we're just going to have to deal basically with an environment where we have higher inflation and higher interest rates, it’s really as simple as that.
Now that's also impacted supply chains, not just of energy, commodities itself, goods productions, but also labor. Take us through your thoughts as we work through this. And we're coming out on the other side, take us around the world.
If we just take regional equity markets, if you like, clearly the dominant one continues to be the U.S. I think the case for the U.S., even though I think that the direction of yields, the direction of interest rates, the inflation, the Fed, all of these things make me less bullish looking forward so far as the U.S. market is concerned. The bull case, however, is where else are you going to put your money? It's the only market really that's done incredibly well in the past 20 years.
Today, I think last week, actually Europe, believe it or not, it was 20% lower than where it was 20 years ago. I think Europe's interesting because I think the need for independence with regards to energy, with regards to defense, the flip from fiscal austerity to fiscal stimulus, these are big picture things for Europe, existential things for Europe. And I think that that could, could cause Europe to do better going forward.
Emerging markets are ever very much dependent on what China does. I think if China remains part of our global world order, I think that emerging markets also are going to do quite well, because remember the dollar is the other thing to take into account here. I think if the dollar peaks this year and I think it will, then emerging markets come back into place. So I think rest of world equities look actually quite interesting, just over the next two or three years.
You brought up the dollar. You mentioned that you think the dollar might peak. Is this because of high deficits, is it just because a supply of dollars out there. What is that trend that you're seeing that gives you comfort, that you might see this weakness in the dollar?
I think the dollar, first and foremost symbolically, is extraordinarily important so far as risk assets are concerned. If you remember in March of 2020, the dollar was the only asset that went up because there was absolute fear raging across all markets. And the moment the dollar peaked was the moment the equity market and the bond market began to recover.
So it's an extraordinarily important sort of symbolic symbol of risk appetite. Personally this year I think the dollar's going to run into some issues. The Fed is very much behind the curve. But I think it's more a credibility issue so far as the Fed is concerned, really driven by the inflation.
Recession risks have risen. The probability of recession has risen if you take a look at counterparty measures and other financial stress mechanisms or indicators. Help us square that rising recession risk. And is it a shock in terms of the actual event or is it the fear that the event could happen?
Well, for investors, it's the fear that they'll react before the recession, and markets, as you well know, are extraordinary brilliant storytellers, and if you can read the tea leaves well enough, you often get a head start on what's going to happen. So for example, the inflation shock that you mentioned earlier on, the rate shock that we're going through right now, you could tell that through commodities, you could tell that through the banking stocks and so on and so forth.
I think what you'll be watching, what I'll be watching very closely going forward as to whether we are moving towards pricing in greater recession, is traditional things that you watch as you're going into recession. One could be the yield curve. Another could be the dollar we just spoke about, if the dollar starts to weaken when the Fed is raising interest rates, could be a sign that the currency markets are saying uh-oh. And then within the stock market, it's anything to do with the consumer, anything to do with the housing market, those are going to be very critical indicators as to watch for.
What turns investors’ sentiment around? Right now it's fragile, a large wall of worry for obvious reasons. What turns investor sentiment to get back to the other way, at least to just create some stability?
Well, I think you're getting there already. I think the market's already beginning to anticipate a ceasefire, whether they’re right to or wrong to, we’ll see. But certainly the markets are beginning to anticipate a ceasefire at some point in the spring. You can see that with the price of oil, which has already fallen 20, 30, percent from its high. So those are two things I'd watch very closely.
The third is really that you don't see the treasury yield become unanchored. I think that the equity investors are very sensitive to the messages they're getting from credit markets, the messages they're getting from bond markets. So again, if the Fed's credibility can stay input sufficiently that A) financial conditions remain relatively stable and B) the market can discount a soft landing rather than a hard landing, markets are going to regain their footing, clearly, in the spring, and you're going to avoid a big bear market. You're probably more likely going to be in a consolidation channel for much of the next six months.
Under the big umbrella of the big shifts where financial markets are going to try to figure out the big themes for the next, say, five, six years, dare we say decade. I know it's hard to tell right now, but given your insights, what big themes do you see out there?
Well, there's one big macro theme which is inflation and the impact that that will have on commodities or small-cap stocks or rest of world stocks or value stocks. That's a big theme. I think relating to what we've seen in 2022 and the conflict that we've seen between Russia and Ukraine. I'd say there were three. One is security. There'll be greater defense spending, greater spending on cyber security areas like that going forward. I think related to COVID, there's a big story with regards to health, biotechnology, I think those are going to continue to be big themes going forward.
The third one of course is energy, which again, relates back to Russia, Ukraine and the need to develop less reliance on fossil fuel. It's very tough and again, maybe you need to see oil prices higher to generate that outcome. But I think energy, health, security, together with inflation would be the big four for me.
And then within that, would you say climate, climate risk?
Without question, I mean that factors into the energy theme and the security theme as well. Both of those sort of converge in terms of climate. So I think climate's going to remain a big one too.
Be more diversified in the next 10 years versus last 10?
Without question. If you think about it, Chris, the last 10, 15 years, if you had FANG stocks, investment grade bonds and private equity, I mean you really sort of cleaned up, so you wanted a really concentrated portfolio that was very U.S. dominated. I think going forward from here, you just need to be much more diversified, more commodities, more rest of world stocks, more sort of bonds and so on and so forth.
It's a great place to end. Thanks for joining me.
And thank you all for tuning into part one of this Merrill Perspectives podcast on “The big shift: New market forces and ways to prepare.”
Be sure to listen to part two, where we zero in on the U.S. markets and economy and offer portfolio insights and ideas you could consider now to prepare for the risks and opportunities ahead.
To watch the webcast version of this program -- and to learn more about our latest insights on the markets -- please visit ml.com. And you can sign up for Merrill Perspectives wherever you get your podcasts.
Thanks again for listening.
This podcast was recorded on March 21, 2022.
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Chris speaks first with Ian Bremmer, president of Eurasia Group and GZERO Media and a leading expert on geopolitics, for his insights on the major events and trends happening around the world, including the Russia-Ukraine conflict, the U.S.-China relationship, technology and climate change. Chris is then joined by Michael Hartnett, chief investment strategist for BofA Global Research, on why he thinks we’ve entered a “new era” for the global economy and financial markets, and what that could mean for U.S. and global equities. Michael also offers four key investment themes for the future.
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