Welcome back to the '70s Pomperipossa in the world of money

In 1976, Astrid Lindgren, author of the famous Pippi Long Stocking, was charged by the Swedish government with a marginal tax rate of 102%. In response, the writer published a satirical fairy tale under an eloquent title "Pomperipossa in the world of money". This not only ushered in a fiery debate, but also led to a significant defeat of the Social Democrats in parliamentary elections in the same year - the loss of power for the first time in 44 years.

I am referring to this story because Astrid Lindgren's main argument to the government was that the government, seeking not only to tax the writer but also to decide everything that pertained to her, went beyond the limits. To quote Pomperipossa: "102%, that's downright impossible." In my opinion, the last two months have shown that anything - literally anything - is possible.

About the Author

Steen Jakobsen, Chief Economist and CIO Saxo Bank. Djoined Saxo in 2000. As a CIO, he focuses on developing asset allocation strategies and analyzing the overall macroeconomic and political situation. As head of the SaxoStrats team, Saxo Bank's internal team of experts, he is responsible for all research, including quarterly forecasts, and was the founder of Saxo Bank's outrageous forecasts. Before joining Saxo Bank he cooperated with Swiss Bank Corp, Citibank, Chase Manhattan, UBS and was the global head of trade, currency and options in Christiania (currently Nordea). Jakobsen's approach to trading and investing is thought-provoking and is not afraid to oppose consensus. This often causes debate among the global market community. Every day, Jakobsen and his team conduct research in various asset classes, covering major macroeconomic changes, market movements, political events and central bank policies. With over 30 years of experience, Jakobsen regularly appears as a guest at CNBC and Bloomberg News.

Huge monetary risk

In recent months, we have witnessed a departure from the idea of ​​savings, loss of independence of central banks, abandonment of EU fiscal rules, unlimited quantitative easing around the world, an explosion of the Fed's balance sheet to save Wall Street and high-risk corporate bonds, a slightly less effective allocation of billions of sums to save ordinary citizens, introducing the back door of universal basic income (subsidies), Modern Monetary Theory (monetization of government debt through expansion of central bank balance sheets). American took the most aggressive actions Federal Reserve under Powell's leadership, broadly opening swap lines for global central banks and - as part of one of the more creative solutions - violating the provisions of the Federal Reserve Act by using special purpose vehicles (yes, that's right) to "Keep everyone together".

The argument of keeping them all means a huge moral risk, because we not only move away from discovering prices, but also from the entire market economy. This kind of help can go to the boards of airlines that have left no cash on their balance sheets and have divided hundreds of millions of shares in the form of options, cleaning up these balance sheets through extensive own share purchase programs. Another example is IBM, which has spent USD 157 billion over the past ten years, but its market capitalization is currently USD 102 billion. Maybe we should refer to another Scandinavian writer - the Danish HC Andersen and his fairy tale "The Emperor's New Clothes" - to fully understand what is happening.

Unlimited support in any shape and form means that we currently have paradigms and business models that should not be possible: negative interest rates, paying borrowers for borrowing, and even negative oil prices or paying buyers for using fossil fuels. I could try to explain why this is the case, but this task simply exceeds my strength because it just doesn't make any sense. Naturally, I could be tempted to provide explanations in the form of a "talking head", but the market environment is simply too nonsense in the world to be understood.

However, it is clear that both negative yields and negative oil prices are a function of "Pomperipossa in the world of money" - crossing borders by governments and central banks. Governments have replaced the markets in determining prices, and thus demand and supply. Oil has become too cheap - and for the time being its value has become negative due to the benefits of oil producers in the form of subsidies and due to wrong investments leading to low interest rates. As a result of this "support", the marginal entities extracted oil, even though they did not realize positive cash flows, even at a time when oil prices were much higher. To put it simply: oil prices have now also reached zero, and in addition - as my colleague Mark Voller said to me this week - we now have 'liquid but insolvent companies' operating in all sectors, but in particular in industries involving a significant number of places work, extensive investment and strategic significance. Welcome to the world of money!

Time travel

In the early 70s, both the government and the dollar were strong; after Nixon's departure from gold parity in 1971, the US currency lost its value, inflation and unemployment increased. This decade was marked by restrictions on supply and terrorism. In the geopolitical area, EU enlargement and the opening of China took place. For the first time, attention was also paid to environmental policy.

And now? In my opinion, we have come full circle in the last 50 years and have not learned anything. The First Earth Day took place exactly 50 years ago; today the environment is facing even greater problems due to our anthropocentric point of view; China can be "cut off"; The USD is very strong and continues to be a global reserve standard - a standard from which the world desperately needs to break free, because the Fed and the US government have decided to pay reverse holders based on money printing to every US debt holder. The number of EU Member States has reached its peak and is likely to fall again (who will be the first? Hungary? Italy?).

Inflation is still unsatisfactory despite a desperate attempt to "reach 2%". However, bottlenecks and destruction of real capital as a result of the current crisis, combined with unlimited spending and subsidies to keep everyone together, will lead to a triumphant return of inflation over the next two years. In the United States, unemployment reaches 20% or more - and it will eventually fall, but more than 100 million American families are paying for this "inconvenience" here and now, and universal basic income programs will work relatively similar to former trade unions, forcing companies to increase costs work to find candidates to perform any job. In short - welcome back to the '70s

More than analogies to the 70s, I am worried that the other aspects of our situation resemble the period after World War I. This was the last time we were dealing with truly mass bankruptcies of countries. This time Ecuador has already declared bankruptcy, African countries have obtained an eight-month moratorium, and Argentina has announced its own moratorium, dismissing its creditors. In the Middle East, Oman and Bahrain have been de facto cut off from the bond market and the prices of their credit default swaps (bankruptcy insurance) are steadily rising.

To understand the true effects of debt and potentially bad debt, I recommend an article about how just a few years ago Britain paid off the rest of its debt at that time; Germany did it in 2010, and the United States continues to "keep everyone together" (although I am convinced that the Fed is ready to print some money to help with this).

The two tables below are from the article by Carmen Reinhart and Christoph Trebesch of October 21, 2014. Sovereign-debt relief and its aftermath: The 1930s, the 1990s, the future?

Let's take a look at the debt cancellation necessary in the 30s: the ratio of debt relief to GDP for France is 52%, Great Britain - almost 25%, Italy - 36% and Greece - 43%.

"Briefing" on the debt crisis

We monitor Italian BTP government bonds as an indicator of the assumption that the EU will hold. The BTP market sends warning signals despite the fact that the majority of Italian debt is in the hands of Italians; we will soon be facing a situation in which membership in the EU trade club will no longer make sense, there will be no goods that can be traded and the former debt will be denominated in a currency that Italy cannot control directly. In addition, if the Covid-19 crisis is not the perfect time for Europe to take solidarity, when will this moment happen?

Above all, however, the real reason for the debt crisis is not the collapse of international cooperation, but the fact that governments and central banks have gone too far in saving the world of money this time.

Let us remember that the integrity of government funding is based on one thing only: the government's unlimited ability to tax businesses and citizens. Over the next ten years, the situation will resemble the conditions of the 70s: the growing share of the state treasury in the ownership structure of enterprises, dictation of business and management decisions, ever smaller return on invested capital, but also much higher taxation - first of all technology companies, and then also other enterprises and financial income. VAT, inheritance and real estate taxes will increase. Deficits will go up, but this time they will be less expensive due to the new wonderful world of yield curve control, which will keep government funding artificially cheap and devalue past debts as inflation far exceeds reference rates. This is a de facto definition of financial repression and will lead to a huge bull market on the market of tangible assets. This is also nothing new - the Fed was tasked with controlling the yield curve after World War II to devalue US government bonds used to repay war expenses.

Let's prepare ourselves, because the world is fast moving to a point where there is no price discovery, both positive and negative risk is guaranteed by one entity, taxes are higher, and huge changes are taking place in society. This requires a recalibration of the concept of "good life", which we have already got used to.

Astrid Lindgren led to a change of government; personally, I am convinced that crossing the borders and governments in the style of the '70s will end the same way, but first this political response must fail. Only through failures can we learn something. This was taught to us in the 20s, 30s, 70s, and more recently in 2007-2020.