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Newsletter 25

23 Oct 2020

Global Macro-economic and Geo-political Update

Continuing on from our last newsletter, the macro-economic outlook does not look good despite the massive fiscal stimulus by governments and central bank intervention. The latest figures reveal global Gross Domestic Product (GDP) growth being negative (6%).  

In 2021, do not be surprised if governments’ fiscal programs substantially increase as they continue to try and bridge the demand gap that they created when they closed economies down. In the US for example, the current debate is whether the next fiscal stimulus should be $1.5 trillion (Republicans) or $3 trillion (Democrats) and will it be passed before the elections. We expect further packages in 2021 regardless of who wins the Presidential and Congressional elections and the size of the packages will be greater, as they will be in Japan and the Eurozone, and likely in Australia.

This is because global GDP growth is negative, unemployment (Australia 6.9%) is high and monetary policy is ineffective. 

The comparisons with 1929 continue as shown by the graph below and reported in earlier newsletters.

It is still possible to get real returns from Australian bonds as shown in the chart below. Please note these figures exclude the cost of currency hedging for Australian investors in international bonds which effectively makes the returns negative.

The RBA has indicated that they will engage in yield curve control to suppress rates along the yield curve and start Quantitative Easing (QE) again. This announcement has slowed the appreciation of the AUD against the USD, as well as the recent budget announcements.

We continue to monitor global markets and macro-economic events closely. The best advice is to ensure you live well within your means and lowering your expectations of investment returns. 

Our next article will be about the major macro and fiscal changes coming with central banks introducing digital currencies. On 15 October 2020, China was the first country to start trialling a Central Bank Digital Currency (CBDC) and in this last week, the IMF has called for a new Bretton Woods like agreement.

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