While much of the world has gotten back to normal following the worst of the Covid-19 outbreak, J.P. Morgan Asset Management’s Jared Gross has been focused on longer-lasting economic and market legacies of the pandemic.
(Bloomberg) — While much of the world has gotten back to normal following the worst of the Covid-19 outbreak, J.P.
Morgan Asset Management’s Jared Gross has been focused on longer-lasting economic and market legacies of the pandemic.
They include the massive reshaping of global trade relationships and the end of what is known as “the central-bank put,” or the once-prominent belief that investors could rely on monetary-policy easing to calm markets when they became too volatile.
Gross, the firm’s head of institutional portfolio strategy, joined the What Goes Up podcast to discuss the bank’s take on the post-pandemic world, as well as other hot market topics. Here are some highlights of the conversation, which have been condensed and edited for clarity.
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Q: You and your colleagues recently put out a 70-page report that discusses some of the long-lasting changes to markets and the economy because of Covid.
How would you sum up the biggest takeaways from this report?
A: What you had before Covid was a very globalized economy with long supply chains. You had a lot of migration that took the pressure off of developed market economies when it came to a declining labor force.
You had low inflation, which led to a very sort of deeply ingrained accommodative monetary policy: QE, low interest rates across the board. And then because we had low interest rates, we had rising asset prices, and we had a lot of leverage.
And so, Covid comes along and shocks that system. And I think that that equilibrium that existed pre-Covid was somewhat fragile. That doesn’t mean it was necessarily doomed to unwind, but Covid came along and sort of did that for us.
And so in that shock, you had phase one was the health crisis and a lot of government spending and the shutdowns, and we all kind of lived through that.
And then maybe less well-understood was the fiscal impulse that came on. And that’s important because prior to Covid, the monetary policy authorities were the only game in town. If anything, they were pushing back against austerity and there were very low levels of fiscal spending.
And that did a complete 180. When Covid hit, the fiscal authorities woke up, they started spending money, and the monetary authorities actually financed it. If you look at the amount of debt that was issued during Covid, almost to the dollar, it was paid for by central bank balance sheets.
And so that shifted the entire sort of economic dynamic.
And I mean, we look at supply chains and, you know there’s a lot of narrative in the market now about de-globalization. I think it’s actually much more subtle.
It’s a rewiring of trade. The big pipe between China and the developed markets is being split apart. There’s a lot of reshoring, onshoring, friend-shoring, nearshoring, all of that stuff is going on, and it’s a real thing, and it’s going to change the way trade happens.
The fiscal and monetary sort of flip flop, the way we put it in the paper is that the central bank put, which everyone used to talk about, has probably been replaced with a fiscal put.
If you’re looking for a backstop for market volatility, you probably can’t depend on the monetary authorities as much as you used to, because they now have to be very careful, given the amount fiscal stimulus in the economy.
They can’t just cut rates because stocks go down. They can’t just cut rates because a bank is wobbling.
Q: The market keeps fighting the Fed. Jerome Powell’s been pretty clear that maybe two more rate hikes are likely from here.
It just feels like there’s this persistent gulf between what’s priced in and what Powell is actually saying. How do you narrow that gulf?
A: I think the market has sort of learned its lesson multiple times now.
At some point they will be right in the sense that they will be pricing in the actual pivot from the Fed as the economy turns down, as inflation comes down. Thus far, they have not predicted that very accurately.
I mean, you can sort of point the finger at the market broadly. Professional forecasters have not done a particularly good job of forecasting inflation. The five-year, five-year forward rate has not done a particularly good job of forecasting inflation.
Consumer expectations have not done a particularly good job.
So inflation is where it is and I think the Fed is responding to real data about inflation. The core rate is still north of 5%. So does the Fed feel kind of an imperative to cut at this point?
Clearly not. If anything, they’re going to go the other way. You see a lot of volatility in the two-year yield, which is where I think that risk is concentrated. You don’t see as much volatility at the long end of the curve, which is interesting because I think that tells you that, despite all of this uncertainty and the volatility we’ve been through, long-term inflation expectations are reasonably well-anchored.
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