Dame Deanne Julius – “we are on the hinge of history”

Deanne Julius opened the 2022 PLSA investment conference with a statement

“Real life is not a bed of roses”

She asked a crowded hall “Is it too early to say that 2022 was when the world changed?” and spent her keynote explaining how it had, comparing the pre-Covid world that was bookended by PLSA’s last venture to Edinburgh in March 2020, with this conference which she described as “on the hinge of history“.

This is an “edited highlights” of her keynote speech


The new world of Dame Julius

The S&P peaked on January 3rd and since then it has been down as much as 20% (on intra day trading). We have moved from globalisation to bifurcation, from democratic fractures to populism, from monetary excess to fiscal excess, from wage stagnation to rising wages and from deflation to inflation.

Julius sees the past in terms of the good  years leading up to 2019 and the future the years following 2022, the interim is the pandemic.

Trade , finance , investment and labour have all seen globalisation in retreat with disrupted supply chains, on-shoring , higher costs and a drag on growth. The move from globalisation to bifurcation is clearly a disappointment to Julius, we sensed that the world has not become a better place. Life is not a bed of roses.

Populism has been driven by the despair of those left behind by globalisation. This despari lead to the election of populist leaders such as Trump and Orban and the extension of autocratic power by leaders in China and Russia.

This has resulted in US/China trade tariffs and sanctions , and a range of measures put in place by NATO countries against Russia, including the cutting of SWIFT access for  Russian banks, asset freezes and the withdrawal of Western companies from Russia.

The geopolitical implication of this are huge. Russia and China have been driven together as “friends”, this has been cemented by US antagonism, complimentary trade between Russia and China, and a safe currency agreement between the Yuan and the rouble

Julius even questioned whether Russia might become a vassal state of China.

At the same time, NATO is being expanded and united. Finland and Sweden are joining, sanctions are likely to persist.  Even after the  Ukraine war, there will be higher military spending.

Julius’ question is whether NATO may supplant the EU as the predominate western alliance.


So how does this effect the economic outlook?

It means higher energy and food prices, at least for the next 2-3 years. Military and reconstruction support for Ukraine. It means a  large inflow of Ukrainian refugees into Europe and an accelerated investment into renewable energy,

Firms will restructure supply chains , especially in cars and all this uncertainty will depress growth and investment.

This will see financial markets impacted with monetary policy reversing course, a move from free money to positive real rates.  Julius asks how quickly will rates rise and how high?

And there will be less fiscal space for countries to work with. Deficits blew out over the pandemic and the cost of living crisis is really hurting.

As far ass the labour markets go, Julius seees demographic tipping points. In the US, baby boomers are retiring, flush with 401ks, the hangover of the 1 child policy in China.  Shrinking populations in Germany , Italy and elsewhere in Europe will lead to rising wages, especially among the lower paid.

She doesn’t see the Fed triggering a recession. The question is will the Fed be forced back from tightening its policies Julius wonders whether China will stick with its Covid strategy?. Julius thinks it will

And she thinks China stick with new best friend despite the possibility of  secondary sanctions from the West

Julius says that the EU will suffer fr4om sanctions on Russia , especially with gas. The question for Europe  is how high ECB will put up rates. In the UK , inflation will be back down to 3-4% range by 2023 , Employment will be higher and the labour market will be more balance . Both nominal and real wages will be higher

The FTSE will continue to outperform US and EU indices. While interest rates will be higher ,  real rates will still be negative relative to inflation

Taxes will be higher .  The Budget deficit will be higher – with more public spending

GDP will be flat- lining, a technical recession is possible but not a serious one. unless we talk ourselves into one.


So what should we do?

Julius urged the hall to challenge conventional thinking and not rely on official forecasts

She told delegates to prepare for discontinuities and sudden change – don’t assume things will return to 10 year trend

She told us to keep a look out Watch out for new trends and to do our stress testing.

 

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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1 Response to Dame Deanne Julius – “we are on the hinge of history”

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