🌎 August '07 vibes

Plus: UK jitters | Monday, September 26, 2022

Open in app View in browser   Presented By AcreTrader   Axios Macro By Neil Irwin and Courtenay Brown · Sep 26, 2022 It's been an eventful Monday so far, to say the least. In today's edition of Macro, we'll tell you why events unfolding around the globe — including in the U.K. — are reminiscent of the earliest days of the global financial crisis. 🚨 Situational awareness: In a newly issued statement, the Bank of England says it is closely monitoring developments in financial markets as fallout from Britain's tax-cutting proposals continues. More below. 🇬🇧 Today's newsletter, edited by Javier E. David and copy edited by Katie Lewis, is 750 words, a 3-minute read.     1 big thing: That August 2007 feeling Illustration: Aïda Amer/Axios   August 2007 was, on the surface, a fine month for the U.S. and global economy. Unemployment was low. The stock market had a few bumpy days, but nothing too dramatic. Yet many consider it to be the beginning of what we now call the global financial crisis. There were the first signs of long-simmering problems that wouldn't fully boil over for 13 more months. Why it matters: There are some ominous parallels with what the world is experiencing right now. To be clear, we're not predicting a new crisis as severe as the one that rocked the world in 2008. Rather, we're arguing that major (and accelerating) underlying shifts are underway and likely to reverberate for years. How significant the pain will be is hard to predict. It could vary significantly across countries and industries. It's plausible that the economic damage in most sectors of the U.S. economy will be mild. State of play: For a decade-plus after the 2008 crisis, the world was stuck in a low-interest rate, low-inflation, low-growth rut. Central banks searched for novel ways to loosen monetary policy to stimulate demand, including negative interest rates and quantitative easing. They concluded that the "neutral rate" of interest had become much lower, due to seismic forces like demographics and globalization. The widespread view — reflected in bond prices and officials' comments — was that after the pandemic's disruptions passed, this low-rate normal would return. Until recently, at least. What's happened in the last few months — and with dizzying speed in the last several days — is that markets are adjusting to the possibility that the era of extreme low rates and liquidity is over, and the 2020s will be very different from the 2010s. Consider that at the start of the year, a 30-year U.S. Treasury bond yielded 1.92%. That's up to 3.62% as of 10:45am EDT this morning. The effects of that repricing are only beginning to ripple through the economy. It's most visible now in housing, but could eventually affect everything from the sustainability of large budget deficits to the viability of any business relying on lots of leverage. What they're saying: Donald Kohn, who played a key role in fighting the global financial crisis as the No. 2 official at the Fed, had some prescient comments last year. "It's possible that [the natural rate of interest] is higher than backward-looking models now suggest," he said at the 2021 Jackson Hole symposium, noting loose fiscal policy and pent-up savings. "But the transition to a higher rate environment could be pretty bumpy given that a lot of asset values and assessments of debt sustainability are built on very low interest rates for very long." The bottom line: We're in the early days of seeing how a world of tighter money will play out across sovereign nations, real estate, the corporate sector and more.     A message from AcreTrader A new way to Invest in an old asset: farmland     Land has historically produced significant wealth with limited correlation to a volatile market, but most investors haven't had access — until now. AcreTrader offers passive ownership in farm and timber properties, helping diversify your portfolio with real assets. Find out how.     2. UK woes reverberate across markets Andrew Bailey, governor of the Bank of England, at a press conference last month. Photo: Yui Mok-WPA Pool/Getty Images   The U.K. government's tax-slashing proposals set off turmoil across financial markets on Friday. It's not over — and it's prompted a rare statement from the country's central bank. Driving the news: The Bank of England said it is watching developments in financial markets and "will make a full assessment at its next scheduled meeting of the impact on demand and inflation from the Government's announcements, and the fall in sterling, and act accordingly." "The [Monetary Policy Committee] will not hesitate to change interest rates as necessary to return inflation to the 2% target sustainably in the medium term, in line with its remit." The announcement falls short of what some eco-watchers began calling for over the weekend: an emergency rate hike. Why it matters: There are concerns the tax-cutting spree is fiscally unsustainable, may stoke already-soaring inflation, and could require an even tighter monetary policy. The pound plummeted to an all-time low against the dollar, while government yields saw some of the biggest spikes on record — an unusual (and worrying) combination of moves for a rich country like the U.K. What's going on: In early trading, the pound crashed. At its lows, it took $1.03 to buy one pound. The BoE's announcement didn't do much to stem the free fall. After regaining some ground earlier, it continued to slide following the central bank's statement. Big action, too, came in the bond market. For a sense of the stunning rise in borrowing costs, consider this: On Thursday, before the government unveiled its proposals, the yield on the U.K.'s benchmark five-year bond hovered near 3.58%. Now, as of noon EDT, it's sitting at 4.54%.     A message from AcreTrader Maybe it's time for a boring investment     Over the past 20 years, farmland has consistently outperformed other asset classes over time with slow and steady growth. Okay, but: What about stocks? Unlike farmland returns, the S&P 500 is down 17.5% YTD. Try something boring like farmland.   Are you a fan of this email format? It's called Smart Brevity®. Over 300 orgs use it — in a tool called Axios HQ — to drive productivity with clearer workplace communications.   Axios thanks our partners for supporting our newsletters. If you're interested in advertising, learn more here. Sponsorship has no influence on editorial content. Axios, 3100 Clarendon B‌lvd, Arlington VA 22201   You received this email because you signed up for newsletters from Axios. Change your preferences or unsubscribe here.   Was this email forwarded to you? Sign up now to get Axios in your inbox.   Follow Axios on social media: