MacroVoices #443 Viktor Shvets: From Central Banks To Assets Classes To Geopolitics & More
Viktor Shvets argues that central banks have committed policy errors by keeping rates too high, but the consequences are minimal due to excess global capital. He views current geopolitical tensions as a return to normal Cold War-era conflicts rather than escalation to hot war.
Summary
Macquarie's Viktor Shvets discusses central bank policy errors, arguing that while the Fed and other central banks kept rates too high after inflation was defeated in early 2023, the impact is cushioned by unprecedented excess capital ($500-800 trillion globally). He attributes current political polarization to what he calls the 'Fujiwara effect' - a merger of technological disruption, financialization, and neoliberal policies, comparing the current era to the 1930s rather than the 1970s. On geopolitics, Shvets sees current conflicts as a return to Cold War normalcy rather than escalation to hot war, describing a 'ring of fire' of potential conflicts from Belarus through the Middle East to Taiwan. He argues that Russia and Ukraine cannot negotiate because their positions are irreconcilable - Russia's imperial identity requires Ukraine, while Ukraine fights for its very existence. On markets, he expects the US to remain range-bound due to lower earnings growth offset by declining risk-free rates, with technology remaining fairly valued despite high multiples. For commodities, he sees long-term demand for copper and other transition metals but notes that China will never again provide the growth support it did in previous cycles, having accumulated massive debt and declining capital efficiency.
Key Insights
- Central banks committed policy errors by keeping rates too high after inflation was defeated in early 2023, but excess global capital of $500-800 trillion cushions the real economy from these mistakes
- The current era resembles the 1930s more than the 1970s, with political polarization driven by a 'Fujiwara effect' merging technology, financialization, and neoliberal policies
- Current geopolitical tensions represent a return to Cold War normalcy rather than escalation toward hot war, with conflicts occurring along a predictable 'ring of fire' from Belarus to Taiwan
- Russia and Ukraine cannot negotiate because their positions are fundamentally irreconcilable - Russia's imperial identity requires Ukraine while Ukraine fights for its existence
- The yen carry trade unwinding was a 'heart palpitation' rather than a 'coronary attack' because it showed no contagion in credit spreads or basis swaps
- US equity markets should remain range-bound as lower earnings growth will be offset by declining risk-free rates, with neutral US rates around 3-3.5%
- Technology stocks are not overvalued despite high multiples because they generate ROEs over 30% and strong cash flows, while equity risk premiums are at dot-com era lows
- China will never again support global commodity demand like it did previously, having gone from $5 trillion to $65 trillion in debt with dramatically reduced capital efficiency
- Copper has long-term demand unlike oil and coal which are 'modern-day tobacco', but supply typically emerges when shortages are predicted
- Global growth rates are structurally declining from 4-4.5% a decade ago to 2.5-2.7% today, creating a 'twilight' environment with no recessions but no strong recoveries
- Political parties are being forced to eject their most extreme ideas to become electable, suggesting the electorate is not yet 'mad enough' for true extremism
- Oil markets successfully redirected Russian supply through legal and illegal channels, demonstrating remarkable adaptability in global energy flows
Topics
Full transcript available for MurmurCast members
Sign Up to Access