Opportunities in the chaos

“May you live in interesting times,” is supposedly an ancient Chinese curse. Times have certainly been interesting, so perhaps we are cursed. However, like many such expressions, it is probably apocryphal. According to Wikipedia, the closest Chinese saying on this topic is: "Better to be a dog in times of tranquillity than a human in times of chaos."

Tranquillity is not what the past three years have offered us. And the last few weeks have seen moments of chaos, particularly in local markets.

Ceiling lifted
But let’s start with a bit of good news. The US Congress raised the debt ceiling for two years until after the next election. The agreement comes with only minimal spending cuts. The US federal government can now resume normal borrowing and spending activities. This removes two tail risks for the US economy, and by implication, global markets. The first is that there will be no default on US government debt. This is hugely important since it could’ve been catastrophic, as these bonds are the bedrock of global finance. The second is that deep spending cuts are not part of the latest deal, unlike in 2011. Those cuts contributed to a much slower economic recovery from the Great Recession.

However, since US fiscal policy will only tighten marginally, monetary policy might have to do more. This is because there is still plenty of evidence of inflationary pressures in an economy that is still chugging along, despite areas of weakness.

Most notably, US consumer spending remains solid. Jobs are still plentiful (there were 10 million job openings in April, 1.8 for every unemployed person). Many households still have some savings from the lockdown days to draw on. And most homeowners aren’t affected by higher interest rates since their mortgage rates are fixed.

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