At a time when conflicting voices are raised as to when full recovery will arrive, we are pleased to present below a summary of four articles with unique insights that may have an impact on our lives and portfolios in the medium term.

Inflation Is Already Here—For the Stuff You Actually Want to Buy

James Mackintosh, Wall Street Journal
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As the pandemic has shifted consumer trends, the bifurcated effect on inflation has created a disconnect between the official inflation figures and the average consumer’s experience. Demand for “Covid essentials” like home food, bicycles, reading materials, and television/streaming services has increased, driving up prices in these areas. Meanwhile, demand in other sectors, such as tuition, public transit, hotels, and airlines, has dropped. The result is a balance of inflationary and deflationary forces, a tricky scenario for the fiscal policymakers at the Fed. In addition to the pandemic pressures on inflation and deflation, politics drive the equilibrium as well. While federal stimulus has generated additional household income during the past few months, the remote likelihood of another round of stimulus before the election will permit the delayed effects of widespread unemployment to negatively affect the market. On the whole, the deflationary forces appear stronger for the short term, especially as the second wave of the coronavirus sweeps through Europe. While there is hope that the economic lessons from the first round of shocks will provide a map for navigating the remainder of the pandemic, there remains the likelihood that world governments will miss the balance, providing too little or too much stimulus.

The World Still Needs a United West

David McKean and Bart M. J. Szewczyk, Foreign Affairs
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The traditional transatlantic alliance between Europe and the United States has reached a low point in recent years. President Trump has antagonized European leaders on several occasions, including threats of a US withdrawal from NATO. While the relationship is certainly strained, it is by no means unsalvageable – both parties’ foreign policies rely on continued cooperation, and the balance of material resources and income generation remains in the global West. There is a need for a re-envisioned Atlantic Charter, one updated for the demands of the 21st century. Given the current president’s outright hostility at times towards the US’s European allies, and public contempt towards Mr. Trump in much of Europe, a revival of NATO or the birth of a successor seems unlikely in the current climate; German Foreign Minister Heiko Maas stated in 2018 that the US could no longer be regarded as a “trusted ally.” For all the high-level fireworks, policymakers on both sides would like to see the alliance revitalized and are willing to go through the work of restoring the relationship for the good of liberal society across the world. 

Where have all the fundamentals gone? – Investing post-Covid 

The Economist Intelligence Unit 
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Equity markets have become increasingly disconnected from economic fundamentals this year. Though the real economy is in a deep recession, markets are being driven up by fiscal stimulus and trillions of dollars of central bank liquidity. Meanwhile, the Covid-19 pandemic and geopolitical tensions are stirring up extreme levels of uncertainty. The Economist Intelligence Unit believes there are three key themes that will be important to investment performance over the next five years: 

1. There is no end to monetary stimulus in sight.
2. Prepare for a backlash from political shocks. 
3. Prepare for a bipolar world where tensions between the US and China rise. 

Covid-19 has been deeply disruptive to many sectors, especially to travel, entertainment, tourism, and higher education. Governments will be pressured to support the status quo even when there will need to be a shift towards more profitable sectors. After having provided unprecedented levels of monetary and fiscal stimulus, the government and the public may have a heightened set of expectations for the contribution companies make to society which could lead to new policy trends. Furthermore, wealth gaps are being exacerbated by the pandemic which could lead to rising political tensions within and between countries. It is particularly important to keep an eye on the rising tensions between the US and China which could greatly affect global supply chains. While supply chain realignments will create new opportunities, investors will need to take a lot into consideration including the political stability, trade and exchange controls, infrastructure, and technological readiness, among other things, of the countries involved in the new supply chains. 

Iran and Saudi Arabia Battle for Supremacy in the Middle East

World Politics Review
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The battle between Saudi Arabia and Iran for supremacy in the Middle East can be seen in nearly every regional issue including in the wars in Yemen, Syria, and Libya in which Saudi Arabia and Iran support opposing sides. This rivalry is also evident in the Israel-Palestine conflict. Saudi leaders are willing to keep their mouths shut on the Palestinian issue in return for Israeli support in containing Iran. Furthermore, Saudi Arabia’s crown prince, Mohammed bin Salman, has been strongly supported by the Trump administration which has been heavily involved with Israel. Most recently, the US has brokered diplomatic deals between Israel and other Arab countries. In addition, the Trump administration has rolled out a Middle East peace plan which very much favors Israel and seeks to undermine the Iranian regime in the process. The political situation throughout the Middle East remains in flux and both Saudi Arabia and Iran are facing challenges. The Saudi crown prince is dealing with international blowback for recent brutal actions, such as the murder of journalist Jamal Khashoggi in October 2018. Meanwhile, Iran continues to be backed into a corner economically by US sanctions that have devastated the economy. The culmination of tensions between the Saudi Arabia-US alliance and Iran over Iranian provocations, including drone strikes on Saudi oil facilities, led to the US assassination of Iranian General Qassem Soleimani in January. Though the issue did not escalate into open warfare, tensions remain high.