Starting next week, we will begin alternating our Covid-19 and the Day After publication with a new commentary summarizing articles that highlight the critical geopolitical trends impacting our lives and portfolios. We hope you will enjoy it!

As Covid-19 cases are rising and many countries experience record heart-breaking numbers of new infections, hospitalizations and deaths, and while we are awaiting the production and distribution of vaccines, we would like to share with you below a summary of four articles with unique insights that may have an impact on our lives and portfolios in the medium term.

The risks of the global Covid debt bridge 

Gavyn Davies, Financial Times 
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The Covid-19 pandemic has required an unprecedented extension of public and private debt in order to avoid a global economic depression. The Institute of International Finance predicts that the ratio of global debt to gross domestic product will increase to a record 365 percent in 2020 as compared to 320 percent in 2019. Financial markets have been ignoring these warning signs as global equities surge to new highs. Fortunately, macroeconomic conditions are offering some support for higher debt ratios. Secular stagnation has created an excess of global savings over investment which has reduced real interest rates as well as inflation. As a result, central banks in advanced economies have been able to purchase nearly 63 percent of the rise in their government debt. This support offered by central banks who act as market-maker and lender of last resort, has made debt crises much less likely. While a debt crisis does not seem to be an immediate threat, it is important not to underestimate the damage such levels of debt can cause. US corporate debt, which has greatly increased in the consumer sectors most damaged by Covid-19, and funding stress on small and medium-sized companies especially in the European Union, are areas of concern. However, if the debt burden is controlled and distributed correctly, we can avoid a systemic debt crisis. 

Peak Oil is Suddenly Upon Us

Tom Randall and Hayley Warren, Bloomberg 
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The Covid-19 pandemic has dramatically changed the global oil market outlook. If you asked an oil expert last year if the moment of Peak Oil had already passed, they would most likely say it had not been reached yet. Now, more and more experts and prominent oil forecasters are saying the peak may have happened in 2019 or is much closer than previously expected. The year’s drop in oil demand may not be another “crash-and-grow event”. Covid-19 has accelerated the long-term trends moving the energy markets towards more sustainable resources. According to BP’s estimates, two-thirds of Covid’s impact on oil demand will be from setbacks to the global economy and the remaining one-third will be from permanent changes in behavior. Electric car sales surged this year while the sales of traditional cars broke down; “At a time when the world turned upside down, sales of electric cars defied gravity.” During lockdowns, skies and waterways were cleared of pollution and governments seized the moment to double-down on environmental regulations. With Joe Biden’s win of the US presidency, the globe’s three biggest powers – the US, China, and Europe – are pushing climate change policies that will accelerate the energy transition away from oil. Together, these three powers burn more than half of the world’s crude oil but shifting political forces are often now included in energy forecasts. When oil demand vanished in the first half of 2020, oil companies wrote down $170 billion. BNEF oil analyst David Doherty believes the response would not have been as severe if the oil companies were only focused on a short-term pandemic crash. There is a major lack of confidence in long-term oil demand; “The writing is all over the bloody wall,” Doherty says.

How to Save Democracy From Technology

Francis Fukuyama, Barak Richman, and Ashish Goel; Foreign Affairs
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As much of everyday life has moved online in the midst of coronavirus restrictions, it is little wonder that Big Tech giants like Facebook, Amazon, Apple, Google, and Twitter have strengthened their positions as mainstays of modern life. The seeming omnipresence of these companies has prompted regulatory concerns in the EU and the US, with both bringing antitrust legislation against the companies as the public has become concerned about their outsize role in democratic processes. While most agree that these systems pose a threat to democracy, there is much debate about how to address these concerns. It is difficult to show that tech giants have a negative economic impact on consumers (think about what the pandemic would have been like without Amazon), but in an epoch of “fake news,” viral conspiracy theories, and ideological echo chambers, it is not difficult to see that these platforms cause political harms.

The solution thus far has been to apply social pressure to these companies to fairly moderate their platforms in the public interest, but such a goodwill-based approach does not address the underlying problem of these platforms’ power to shape public opinion. With many traditional antitrust approaches (such as fairness standards, breakups, and data transparency) neutered by the current technology landscape, one possible solution is the introduction of a new class of business: middleware. These companies would act as curators of digital services, utilizing transparent algorithms to present the underlying data. Of course, such an approach could also accelerate the so-called “Great Sort,” as consumers pick the filters that reinforce their pre-existing ideas. Still, in theory these companies would return the power to influence opinion from opaque artificial intelligence algorithms to the consumer. As the world attempts to integrate its physical and digital lives, it is imperative that Big Tech companies be held responsible for their influence over the digital sphere if democracy is to survive.

How Much Debt Is Too Much?

Raghuram G. Rajan, Project Syndicate
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The pandemic prompted a sweeping array of relief measures, growing debt levels to near-record levels as debt-to-GDP ratios near their post-WWII highs. While economists are less concerned about these skyrocketing debt figures than in years past (the cost of borrowing is remarkably low), there is nevertheless an upper limit on how much debt a central bank can issue: investor confidence in present and future net tax revenues. If the government doesn’t make enough to meet its obligations, it won’t be able to roll over maturing debt by issuing new debt as investors doubt its ability to pay off its future obligations. Assuming it cannot generate additional tax revenues, the only feasible option for an advanced economy government (other than default) is higher inflation. Such a response would still cap borrowing as investors demand premiums for inflation risks, raising interest rates. While this is not a call for immediate austerity (targeted pandemic investment in households and firms will translate to future revenues), public spending must acknowledge its limits and not rely on magical monetary thinking.