Calmmarkets,macroeconomicsandMarsmission

For all of last week, the main topic of discussion was the rise in bond yields and how that development is affecting the entire global economy. We discussed why the long-term yields are rising, how inflation expectations are moving up, why such expectation exhibits a phenomenon called reflexivity, why the markets have started ignoring the dovish signals by the central banks and finally, how this will ultimately impact all the asset classes right from equities to emerging market currencies.

While all this market mayhem was going on, a small NASA rover landed on the surface of Mars, roamed around freely and beamed back pictures of the Martian surface. The contrast cannot be more stark, the human intelligence and ingenuity has been able to perfect interplanetary travel but submits meekly in front of amplified volatility in the financial markets. The writer duo John Kay and Mervin King in their book The Radical Uncertainty explain this chasm between the physical sciences and macro-economics in detail. The answer as per them lies in a concept called “stationarity”. The laws governing the celestial bodies (at least at the operational scope of interplanetary travel) are stationary and do not change as the components interact with one another. The exact path to Mars can be calculated because the advent of the Perseverance rover doesn’t mess up with either the Martian or Earth gravitational fields. The laws also of elliptical orbits of planets remain the same today as they were when Newton and Kepler first wrote about them.

On the other hand, the macro-economic laws (if they can be called one) and models are plagued with the problem of non-stationarity, they are constantly changing with the interactions of their components and also have to face “shocks” (either internal or extraneous) like GFC, the pandemic, oil prices or wars from time to time. Let’s see this with a practical example, an importer who was waiting on the side lines to hedge will jump into the fray of buying Dollars as the Dollar becomes expensive and clocks a single day gain of 2%. This movement not only changes the importers behaviour in the current time frame but it also has an impact on future behaviour. The behaviour is now mutated (participants elliptical orbit has changed) and any model which was working fine in a prior time frame should now incorporate this mutated reality in case it wants to remain relevant. Authors end their argument by saying that Mars travel is like a puzzle and macro-economics is like a mystery, for a puzzle a definitive answer exists but for a mystery, we will do well even if we get to know “what is going on here”.

As of the markets, the mayhem of last week appears to have stopped to take a short breath, the 10-year US yields are trading around 1.41, Indian 10 year bond yields are at 6.20, stock markets like Hang Seng, Nikkei are up, Dow Jones futures are also in green. The Indian Rupee which touched close to 74 on Friday is trading at 73.40 currently. The Dollar Index is sufficiently up at 90.85 from last week 90 levels. The change is also reflected in the Euro and Pound levels. This week will see the release of NFP data and provide a picture on how the economy is doing. The wage growth number will give a sense on how much bargaining chips the employees and employers have. The discussion on wage inflation and generalised inflation will take place then.