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In passing, it is also well worth noting how there have been casual coincidences, which have still played a major role in exacerbating the turmoil in markets. While the ‘phase one’ US / China trade deal was decidedly underwhelming, it was perceived to have pushed back heavily on the risks of an all-out trade war, above all in a US election year. Indeed, market implied policy rate profiles were in late January assuming little or no change from G10 central banks, leaving them under-positioned for what has followed, and in itself creating a skew in flow terms that powered the very sharp shift.


The other coincident event was the unexpected breakdown of the OPEC+ oil output cut arrangements, which proved to be the straw that broke the camel’s back for equity indices, bond yields and credit spreads, above all the US Energy High Yield sector. It served as a timely reminder that while the resource and raw materials sectors represent a relatively small proportion of GDP, they are a, if not the fundamental building block for growth, a critical component of price formation, and are disproportionately highly weighted in many equity indices.


However, much of the above narrative is through the rather narrow perspective of financial markets, which are of course critical to ‘oiling the wheels of any economy (despite all too often being self-serving). But with the Covid19 outbreak following hot on the heels of US/China and other trade tensions, there are a number of key issues about certain fundamental tenets of business processes that have evolved in the past 30 to 40 years, which will require a fundamental rethink.


‘Just In Time’ supply chain management has evolved over the past 40 years, and was given a major boost by the end of the Cold War and the ensuing boom in globalization and above all technological innovation. The efficiency savings are all too obvious, above all in terms of costs related to inventory management and labour costs, which in turn have facilitated a boom in corporate balance sheet financial engineering, especially in the post-GFC low interest rate era, as well as primarily benefitting China and more broadly Asia.


But as the tide has gone out on ‘globalization’, above all due to populist narratives in the developed world, and specifically in the context of the US-China trade war proving to be far more about global economic and geo-strategic hegemony, and thus resurrecting a broad array of national and regional security concerns, the underlying principles of ‘just in time’ have been called into question. The Covid19 outbreak and the consequent disruption to supply chains, above all from China, has exposed numerous ‘single points of failures’, or cases of companies ‘putting all their eggs in one basket’, which were certainly not covert. However, in a highly globalized business environment, the risk that addressing such procedural flaws might render companies less competitive, above all in margin terms, as well as requiring greater allocation of corporate balance sheets to the process of securing supply chains in all eventualities, was largely crushed by a preference for financial engineering, above all in the eyes of so many so called ‘investors’. Once the dust settles after the Coronavirus shock to the global economy, which could prove to be more or less transitory, these critical process issues will have to be addressed. How these play out is very unclear, but will doubtless involve less financial engineering, less globalization and a greater reliance on domestic suppliers, and more than likely disadvantage emerging economies reliant on supplying developed world economies with cheap labour, resources and intermediate goods and services. Low or zero interest rates and endless central bank liquidity injections will do nothing to change this, and governments will need to ponder how they will facilitate related process changes via fiscal and structural policies.


Marc Ostwald E: marc.ostwald@admisi.com T: +44(0) 20 7716 8534


5 | ADMISI - The Ghost In The Machine | Q1 Edition


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