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I think one of the big paradigm shifts certainly is US-China relations are now contentious. They’re going to be defined by competition, by an adversarial relationship, and that changes, certainly, the landscape.
Another paradigm shift, I think, as we get into the COVID world, it’s about the next stage of COVID, and we think the next wave is more going to be about learning to live with COVID, which will allow economic activity to be more normal than it’s been over the last year and a half. So, I think that is the next paradigm shift that, if we can get to that point, has significant implications.
The other paradigm shift would be on inflation. We haven’t had inflation in the US for decades, so none of us really know, with certainty, are these inflation surges we’ve seen in the last couple of months permanent or temporary? To us, the risks are there that this becomes persistent, and we don’t want to take that duration risk, but we will continue to monitor those.
Monetary policy is arguably more accommodative today by mandate and design than it has been for quite some time. And increasingly, we’ve seen central banks around the world talk about, not just achieving an inflation target, and not just to full employment, but a distribution of income within that employment, and that mandating more accommodative policy. That has also bled into fiscal policy, and we’ve seen very expansionary fiscal policy.
In terms of the central bank balance sheets, they are obviously huge, and there is discussion around tapering. I think a lot of policymakers have learned lessons from previous episodes to help better manage that. So, our base case is that, that will be managed in a prudent way as possible. We’ve seen some countries begin to already start to taper. There have been other countries outside of the US, particularly in Latin America and Asia, that have already begun on a tightening path. So, the inflation dynamics are somewhat diverse across the world, but at the margin, we have seen more inflationary pressures emerge, and we have seen more tightening, whether that’s rates or beginning to slow down tapering. So, I think that’s the path we continue on.
I think the interesting dynamics in Europe are about this also move towards accommodative policy and, you know, we’re coming up on some huge elections in Germany, and the shifts that could create in terms of fiscal policy, monetary policy, I think, all err on the side of probably more accommodation and expansion. And I think that will have implications for the euro, but in Europe specifically, our excitement is actually more over Scandinavia and in Sweden and Norway, strong current accounts, good growth, probably tighter policy, in the case of Norway that they have signalled. And that, I think, on a relative basis to the euro, to us, looks more attractive or other parts of the world like Canada with the commodity story that is, I think, pretty strong as well. So, it’s not just about euro-[US] dollar, but really euro-Scandinavia and euro to some of the other currencies that we think is equally interesting.
No returns are without risk. We have chosen to target our risk budget towards the currency markets, both in developed markets as well as in select emerging markets. It gets us the yield advantage. We can do so, in many cases, without taking a lot of duration. There is currency volatility in there, but we think greater clarity in these paths of big factors gives us the confidence to go in that direction.
So, we’re excited. It’s not going to be without volatility and without risks. We’ve seen a lot of geopolitical risks develop, but we’re trying to keep an eye a couple of years out on these longer-term trends.
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