This week, we are covering a wide range of topics including markets, great power conflict, digital currencies, and Iran’s protests. First, we look at the wide range of answers from professional investors to the question “where are markets headed?”. Second, we continue our review of the great power conflicts the US is balancing: China and Russia. Third, we learn more about the possibility of central bank digital currencies. Finally, we dive deeper into the driving forces behind Iran’s protests. 

Where Are Markets Headed? Six Pros Take Their Best Guess

Gunjan Banerji, Sam Goldfarb, Justin Baer, Akane Otani, The Wall Street Journal

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With the market trends pointing towards continued downside risk, six heavy-weight investors give their takes on the state of the market and the strategies that they will employ to navigate the current trends. Jeremy Grantham, the co-founder of investment firm Grantham Mayo Van Otterloo & Co., believes that we are in the midst of a “super bubble,” founded on bad fundamentals and valuations of stocks above their long-term average. He believes that average investors ought to hold cash and that you can and should time the market. Echoing that, investor Rob Arnott, founder of Research Affiliates, believes that markets have not yet bottomed, as seen in price-to-earnings ratios which show that equities are still relatively pricey.

Another issue impacting the market is inflation, the impact of which can be seen in the Fed’s response via interest rate hikes. Nancy Davis, the founder of asset management firm Quadratic Capital Management LLC, believes that inflation will be sticky and longer term, breaking with the general consensus among investors. She is preparing to hedge to manage inflation. Both Rick Rieder, BlackRock Inc.’s Chief Investment Officer of Global Fixed Income, and Paul Britton, founder of investment firm Capstone Investment Advisors, are focusing on the impact of interest rate hikes, particularly in the bond markets. Turmoil in the bond market and higher bond yields both present opportunities for investing moving forwards, with Paul Britton emphasizing the need for new strategies, and for pivoting away from those that worked for the last 15 years to the next good 15-year strategy. Finally, not all see a negative environment, with Lloyd Blankfein, the former Chief Executive at Goldman Sachs Group Inc., arguing that we have seen worse in the past, like with the Cuban Missile Crisis. He sees certain trends with Russia’s war in Ukraine, Saudi’s oil pumping policies, and a possible pause in Fed rate hikes as pointing towards a situation that is not as bad as it seems.

The US sets its sights on China as Russia unravels

Biden Is Now All-In on Taking Out China

Jon Bateman, Foreign Policy

Putin’s World Is Now Smaller Than Ever

Angela Stunt, Foreign Policy

While the Russian Federation prosecutes a so-far unsuccessful war in Ukraine, the United States has continued to turn up the pressure economically against China, demonstrating that competing with China is its number one priority. The Russian attack on Ukraine to date has been marred by many setbacks, from its inability to take Kyiv early in the war, to the successful Ukrainian counter-offensives in both the East and South of Ukraine. Putin made four critical mistakes, which continue to haunt him in Ukraine: an overestimation of Russian strength; an underestimation of the Ukrainian people and military; the assumption of a divided West that would not unite in the face of aggression; and a belief that the Europeans were too invested in Russia economically, and in particular on energy, to sanction Russia significantly. Ultimately, Russia’s attempt to reestablish its empire in Ukraine may lead to its undoing.

As Russia unravels, the Biden administration has turned up the heat on China by issuing updated restrictions against Chinese import of advanced semiconductor chips through the Bureau of Industry and Security. This presents a significant, unilateral escalation in the trade conflict started under the Trump administration and portends further escalation in a bid to contain China economically and restrict China’s ability to become a peer-competitor to the US in the long term. The restrictions will have a significant impact on the Chinese economy, including the potential unintended consequence of risk management by a private sector that sees escalating action taken against China as an impetus to decouple American business from the Chinese, including in benign or beneficial areas. However, additional risk exists for the US. Given the unilateral nature of these measures, multilateral initiatives, like the Indo-Pacific Economic Framework, could be much harder to push through given allied concerns regarding the US willingness to accommodate conflicting interests. Beyond that, China could bring a WTO complaint against the US, which could rule against US restrictions. Further, China could make the argument that the US is impeding China’s development of important tools for vaccine development and climate modeling, which might not be viewed favorably in the global south. Ultimately, then, these restrictions are meant to contain China, though risks exist for the US as well.

Digital Dollars Could Be a Boon for Amazon, Alphabet, and Other Tech Companies

Joe Light, Barron’s

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Central banks saw cryptocurrency as inconsequential – before it boomed into a three trillion-dollar market. Central banks are now exploring the idea of digitizing their currencies, especially in emerging markets where digital currency can help unbanked individuals avoid fees for transactions that come with traditional financial institutions. The new type of money is called central bank digital currency, or CBDC, and the private sector may play a large part. Already, central banks around the world have hired tech companies (Microsoft, Amazon, Alphabet) to look into creating and managing digital currencies, and these companies would likely end up hosting the new currency systems on their cloud services. Supporters of CBDCs claim that digital currency flows more seamlessly by bypassing banks, money-transfer businesses, and avoiding fees. Additionally, central banks would have direct access to economic measures such as spending and inflation. China is already well into a pilot program of a digitized yuan. However, there are concerns among critics that CBDCs come with significant risks. CBDCs may be pushed out to the public before the technology is ready or before it proves that it is an improvement over the existing financial system. Also, critics fear that the ability of central banks to track individual consumer spending is a privacy concern. Hacking is also a worry. The U.S. is looking into the idea, but the Fed is wary of it, saying that a CBDC-dollar could potentially harm the dollar’s international standing. These CBDC projects will take years to launch if they ever do, and it would be years before they reach mainstream acceptance. Central banks face challenges in taking steps to digitize currencies due to the lack of political will and the opposition from banks and ‘stablecoin’ cryptocurrencies that view CBDCs as a threat.

Gen Z and Women are driving Iran’s protests

The Women of Iran Have Had Enough

SPIEGEL International

Meet Iran’s Gen Z: the Driving Force Behind the Protests

Holly Dagres, Foreign Policy

A new generation is leading the protests in Iran. Ever since the death of a 22-year-old woman in the custody of Iran’s morality police, protests have erupted across Iran. These protests are of a magnitude unseen since the 1979 Iranian Revolution that installed the current Islamic regime and involve all strata of society and all regions of Iran. Mahsa Amini, the 22-year-old whose death sparked the unrest, was visiting relatives while in Tehran when she was pulled into a police car for “improper” wearing of a hijab. Three days later, she was dead. The regime reported that she died from an underlying condition, a statement that the woman’s family refutes and protesters do not accept.

Economic suffering, years of repression, lack of self-determination, lack of prospects, and the internet have led to Gen Z and women being driving factors in the protests. Women have had to live with the constant threat of being kidnapped by morality police for such trivial matters as wearing lipstick, their ankles showing, and their hijab not covering enough of their hair. They can no longer tolerate the abuse. Gen Z grew up watching illegal broadcasts of Western TV and surfing the internet, seeing their peers in other countries live freely while they experience nothing but repression and corruption in the Islamic Republic. The regime has so far been unable to put down the unrest, but they are trying. The Revolutionary Guard, Iran’s most influential and powerful security force, is becoming more common on the streets of Tehran. Over 100 people have died so far, and the number will likely rise as time goes on. So far, the movement is unstructured with no leadership, but protesters are learning from the 2019-2020 Hong Kong protests how to build resistance movements. As for the future of the Islamic Republic, analysts say two scenarios remain plausible: Either the protests topple the dictatorship, where democracy, a military regime, or chaos follows, or the regime will crush the uprising as they have in the past, and Iran will further insulate itself from Western exposure.