Here is our take on the articles summarized below: 

Even as the Delta variant of Covid-19 continues to spread across the globe, its first- and second-order effects are wreaking havoc on global systems. In our first article, we examine three concerns laid out by analysts regarding the next phase of the markets, from deflation to inequality to cybersecurity. We then pivot to the ongoing energy crisis in Europe, examining how the transition to renewables is both necessary and difficult to implement. From there we shift focus to China and its flagging growth model, a significant driver of uncertainty around global relations. Finally, we close with a look at supply chain hangups in the US.

Wall Street Titans Warn of the Next Big Risks for Investors

Sonali Basak, Bloomberg

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Bloomberg interviewed Cathie Wood, Mohamed El-Erian, and Scott Minerd about the risks facing investors and the global economy. More specifically, each of these “Wall Street Titans” was asked what they are most worried about over the next five to ten years. Contrary to the markets’ current fears of inflation, Wood believes the next big risk is deflation. She points to some specific deflationary forces, the first being innovation in DNA sequencing, robotics, energy storage, artificial intelligence, and blockchain technology. This is good deflation which could lead to an economic boom in the industries where innovation is taking place, but this innovation could also be very disruptive to company benchmarks. Due to risk aversion in the markets, companies have learned to satisfy short-term shareholders, using leverage to buy back shares and pay dividends but many have not invested enough in innovation. Wood also warns of a big drop in commodity prices and a slowdown as inflation outpaces income growth, reducing consumer spending. 

El-Erian is most concerned about inequality, which he argues is an issue financial markets have put aside as a social problem: “a highly unequal society is not an economically healthy society.” The Covid-19 pandemic severely worsened global and domestic wealth inequality and education inequality, and widened the digital divide. El-Erian believes the solution is to invest in human and physical infrastructure to enable people “to do more and to do better.” On the other hand, Scott Minerd believes the number one risk to the global economy and financial system is the sustainability of the global payment system. Minerd says the global payment system is entirely too vulnerable to hackers and terrorist attacks, and nobody seems to be prioritizing its security. International cooperation is needed to assess the threats to the system and modernize it. As evidenced by these three interviews, there are a multitude of risks investors, central banks, and lawmakers need to watch out for in the near- and long-term.

Energy Shortage Reframes the Transition to Green Power

Global Energy Crisis Is the First of Many in the Clean-Power Era

David R Baker, Stephen Stapczynski, Dan Murtaugh, and Rachel Morison; Bloomberg Green  

Why This Energy Crisis is Different

Jason Bordoff, Foreign Policy

The combination of a colder-than normal winter and rebounding economic activity has created a mounting energy crisis in Europe, exacerbated by the renewable energy transition’s growing pains. For instance, in the UK abnormally low wind speeds have reduced the country’s wind farm electricity production, forcing the island to turn to natural gas to keep the lights on. Given that the energy produced from most renewable sources cannot easily be stored for later use, when those sources fail to deliver the required supply the grid struggles to keep up. The increased demand has sent electricity prices skyrocketing in recent weeks; with much of Europe’s natural gas supplied by Russia, the shortage has highlighted the geostrategic implications of energy instability as nations move towards sustainable infrastructure. Yet trade imbalances are only one of the factors at play in the energy transition; many governments are also balancing price stability and carbon emissions in their regulatory frameworks, using the invisible hand of the market to attempt to guide the planet towards a more green future. Such moves are increasingly necessary as the effects of climate change are felt around the globe, yet their short-term consequences – supply chain disruptions, price inflation, and the aforementioned power shortages – are difficult barriers to push past in public policy. Still, world leaders must work through such difficulties if they are to succeed in bringing about a more sustainable future.

“Common Prosperity”: An Engine for Growth or a Dangerous Miscalculation?

China’s New Reality is Rife With Danger

The Economist

A Reckoning for the China Dream

Shang-Jin Wei, et.al., Project Syndicate

“Evergrande will pass. Common prosperity is here to stay. A regulatory clampdown, in conjunction with a push to redistribute income and wealth, rewinds the movie of the Chinese miracle. By failing to connect the dots, China’s leaders risk a dangerous miscalculation.” – Stephen S. Croach While insolvent Chinese property developer Evergrande has made headlines the last several weeks as analysts and investors make predictions on what the company’s default could do to China’s financial system, the most serious problems the Chinese economy is facing have more to do with a major rethinking of its growth model. An Evergrande default will certainly have major spillover effects, including an impact on the psychological well-being of other property developers, and the ability of steel, cement, and equipment suppliers to pay their debts. But this near-term financial woe misses China’s larger challenge of having to rebalance an economy that has depended for so long on massive investment in the real estate sector to create jobs and promote national growth. Perhaps even more concerning, is the government’s regulatory crackdown on the private industries that have been the engine of its economic growth for the past four decades. Xi Jinping’s new dual approach – redistribution plus re-regulation – suppresses entrepreneurial activity, private-sector dynamism, and innovation. Xi’s “common prosperity” campaign to address inequalities of income and wealth, has been propagandized as a move against extreme individual wealth, corporate monopoly, and the exploitation of workers, all for the greater good of Chinese society and the equal distribution of prosperity. Though the message is nicely packaged, the campaign has manifested in the crackdown of the economic sectors that are the engines of wealth and which China needs to reorient its growth model.  

As Xi Jinping wages his campaign against capitalist excesses, he is also conducting an ideological crackdown so that the Chinese Communist Party (CCP) permeates every area of life. Moral review councils and moral clinics are promoting Xi Jinping Thought and enforcing behavior using public shaming. This demonstrates that he is “an ideologue bent on grabbing power for himself, even if growth slows and people suffer.” If his campaign to impose a new reality fails, he will be forced to either double down or begin making compromises. The latter seems much less likely than the former.

Inside America’s Broken Supply Chain

David J. Lynch, Washington Post

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As with many other elements of life, the coronavirus pandemic has revealed systemic weaknesses in the American supply chain, from underinvestment in port infrastructure to labor struggles to a profound lack of collaboration between key players. At one time nearly one hundred container ships sat waiting outside Los Angeles, driving up wait times and supply costs. Even after the ships are unloaded, the containers remain at the port for days, awaiting a truck to ferry them to their destination. Bottleneck stacks on bottleneck, amplifying delays. As shipping costs rise in response to the increased demand, smaller organizations struggle to keep up with behemoths like Walmart and Amazon. Further inland, a shortage of truckers and an overabundance of containers have slowed both the trucking and rail industries, further stretching lead times. Union Pacific Railway went so far as to halt all trains arriving from the west coast and opening a previously closed yard to accommodate the influx of containers. The cost of warehousing these containers once they are delivered has subsequently risen more than fivefold since the pandemic, further deepening the dysfunction of the present system. With such uncertainty and costs to consider, many businesses are struggling to stay afloat as critical transportation infrastructure fails them. If the economic engine is to continue running, a solution must be found soon.