Central banks, investors, and policymakers are coming to terms with the end of a “golden era” characterized by near-zero interest rates, low inflation, and economic growth. The global economy has been shaken up by geopolitical conflict, commodities shocks, and supply-chain bottlenecks which have led to soaring inflation rates. Volatility has plagued financial markets, forcing investors to rethink their strategies, while political and economic shocks have turned nations inward towards protectionist trade policies. This week we examine the battle against inflation, the fall of Big Tech this year, a breakthrough in nuclear fusion, and China’s grip on private enterprise.

The Inflation Battle

Next year’s unpleasant choices confronting the Fed

Mohamed El-Erian Financial Times

Rising interest rates and inflation have upended investing

The Economist

The Fed lost its battle against inflation before it even started. The economic regime of the last two decades – one of economic growth and near-zero interest rates – has collapsed in the wake of inflation of a magnitude unseen since the 1980s. By first mischaracterizing the inflation as “transitory,” the Fed did not act fast or tough enough before inflation began embedding itself in the global economy. Prices and rates are rising from commodities shocks, supply-chain upsets, and labor shortages. In fact, the drivers of inflationary pressure are increasingly coming from the service industry. The Fed (and other central banks around the world) has embraced the goal of keeping inflation at 2%. However, a target of 3-4% may look more feasible. This has given the Fed an uncomfortable choice: does it fight inflation by depressing growth and jobs, or does it raise its target rate, risking even more volatility?

The volatility of the market has caused headaches for investors as well. The 60/40 portfolio strategy has had its worst year since 1937. This year’s turbulence will likely leave a lasting mark on the investing landscape. The chance that interest rates will come down to near zero is low, as inflation will prove difficult for central banks to wrangle. Investors will have to prioritize building inflation-resistant portfolios. This, luckily, is easier than it used to be. Commodity markets have become deeper and more liquid, allowing easier access for investors. Additionally, the revenues from rent and usage from property holdings tend to rise with inflation, making those somewhat of a safe haven.

The Fall of Big Tech?

Disrupting the Disruptors

Roger McNamee, Project Syndicate

The global microchip race: Europe’s bid to catch up

Lauly Li, Financial Times

The stock market’s honeymoon with Big Tech may have ended. These large companies, that drive innovation and make millionaires every day, have hit a rough patch. Twitter is in shambles, Meta has made poor investments, FTX has collapsed, and even Amazon is performing layoffs. Businesses, particularly tech companies, flourished in the economic environment of the last decade which was a time when interest rates, inflation, and geopolitical tensions were low. This low-risk environment made leaders across industries, including policymakers, more risk-acceptant. The Russian invasion of Ukraine in February of this year precluded the end of this golden era. Inflation, interest rates, geopolitical tension, instability, and distrust between governments have increased. It may be years before governments elevate economic interests over security again.As tech companies suffer the fallout, however, policymakers have a chance to reevaluate tech’s contributions to society, to make their products safer for consumers.

Rising geopolitical tensions have also spurred investment in a sector that increasingly powers the global economic system: semiconductors. Much of the industry is highly concentrated in the U.S. and Taiwan, but Europe is attempting to catch up. Earlier this year, the European Commission rolled out plans to invest €43bn to attract chipmakers to open operations in the bloc. This will help the Europeans shore up their share of the global semiconductor industry and alleviate their dependence on Asian producers when geopolitical tensions are running high. While Europe has strong advantages in equipment used to manufacture the most advanced semiconductors, it has some notable weaknesses. Europe has no obvious market for advanced chips. Additionally, many chipmaking companies that were not able to keep up with rising costs for the development of newer technology were in Europe. Europe also faces an even more fundamental issue: it lacks skilled workers, particularly engineers and technicians. Analysts have warned that any further development of Europe’s chipmaking industry will rely heavily on foreign expertise. 

Nuclear Fusion Breakthrough

Nuclear-Fusion Breakthrough Accelerates Quest to Unlock Limitless Energy Source

Aylin Woodward & Jennifer Hiller, The Wall Street Journal

How US scientists moved one step closer to dream of fusion power

Tom Wilson, Financial Times

The United States Department of Energy announced on Tuesday that scientists working at the Lawrence Livermore National Laboratory in the National Ignition Facility have conducted a breakthrough experiment in nuclear fusion energy gain. Energy gain, or target energy, refers to producing more energy than is consumed. The experiment was conducted through a method known as inertial confinement, whereby nearly 200 lasers are shot into a tiny capsule that heats and compresses it until it is hotter than the sun. This process allows for the hydrogen isotopes to fuse, which results in the release of vast amounts of energy. Considered the holy grail of green energy, should nuclear fusion become viable commercially, the potential exists for a near-limitless supply of green energy. As such, governments and more recently private investors have been pouring capital into research, with $3.5 billion of government funding having gone into this facility since 2009 and another $5 billion into private research across more than 30 firms. Nonetheless, commercial nuclear fusion energy production is a long way off. While energy gain was successfully achieved in the experiment, energy gain does not refer to the totality of energy input throughout the fusion process. In effect, the experiment produced 1% energy efficiency. However, there is room for significant optimism should enhancements be made in efficiency and energy gain per shot. Given that the laser used was developed in the 1980s for the experiment, cutting-edge technology could prove significant for achieving both.

The New China Shock

Margaret M. Pearson, Meg Rithmire, & Kellee S. Tsai, Foreign Affairs

Read the full article here

After China’s opening in the 1970s, many believed that by bringing China into a globalized, interdependent economy predicated on neoliberal rules, China would liberalize and simultaneously bring prosperity to Asia, and the wider world along with it. Nonetheless, over the past 15 years, China’s economic liberalization has reversed as the Communist Party leverages ever greater control over private enterprise. The purpose here is strategic in nature and serves a few different purposes. First, it protects the Communist Party against what it views as threats to internal political stability as evidenced by the color revolutions in Eastern Europe in the early to mid-2000s, domestic unrest in Xinjiang and Tibet, and the Arab Spring. Second, it serves to bolster security, in particular through greater self-sufficiency in high-end manufacturing, such as in semiconductors and artificial intelligence, which are supplied by Western companies to a great degree. The Made in China 2025 plan achieves just this; a plan mirrored in the CHIPS and Science Acts passed by the US congress this year, which likewise seeks to protect national security through domestic, high-end manufacturing in products such as semiconductors. In fact, this points to a wider trend:the US and other Western governments have become increasingly suspicious of doing business with China, lest doing so serve the interests of the Chinese Communist party at the expense of Western interests. In order to smooth the way forwards, some suggest the West rethink the rules of global trade through transnational and collaborative rules around standards, openness to trade and capital flows in high-tech sectors, and interdependence with China.