Last week, the world’s political, economic, and business leaders gathered in Davos for the World Economic Forum. The title of this year’s edition was “Collaboration for the Intelligent Age.” In this column, I will discuss what I believe were the key takeaways of the week spent in Switzerland, on the back of the meetings held and the impressions gathered among the participants.
First, the sentiment of economic operators was largely optimistic.
This may have been the result of the inauguration of the US President Trump, which has promised a new “golden age” for the American economy. Given the size and the relevance of the US on the global economy, a boost to its economic activity would likely be felt around the globe. But this may not necessarily occur: the plan that Trump has in mind is largely protectionist and based on “America First,” which effectively means that the US may suck economic activity from other countries in order to boost its own.
In any case, most economic, political, and business leaders believe they can navigate the fragmentation that will derive from Trump’s policies. These may include new and increasing tariffs, but also include a massive investment in new technologies such as artificial intelligence, with the Stargate Project, for which a USD 500bn investment was pledged (even if Elon Musk says it’s unfunded). Trump will also provide a massive boost to the digital assets segment of the economy, including its crypto-asset sub-component, even though he failed to mention the world “bitcoin” in its inaugural speech, thus disappointing the crypto crowd.
Second, geopolitical concerns were muted, compared to previous editions. This was probably the result of the ceasefire signed by Israel and Hamas just before the Forum started, and the hope that Trump can eventually resolve the Russia-Ukraine war. Also, following Trump’s “drill baby drill” approach, the expected massive increase in oil and gas production from the US may reduce energy prices, hence headline inflation, in coming months. But these muted concerns may also be misplaced. On the one hand, immediately after signing the ceasefire agreement, Israel has started new “security operations” in the West Bank, to the point that someone may even question what “ceasefire” actually means. On the other hand, Trump said he would resolve the Russia-Ukraine conflict in 24 hours, but Keith Kellog (his special envoy in Ukraine) said they hope to resolve the conflict in the first 100 days.
Third, there wasn’t much talking about central bank policies. Long gone are the days when central bankers where at the epicentre of public debate, with monetary policy being “the only game in town.” Now, industrial policies and new forms of protectionism are taking centre stage, and central bankers need to adapt and conform their policies to the impact of the decisions made by governments. The Fed is likely to keep its rates unchanged this week, as had been clearly signalled in December. The ECB instead is likely to continue cutting its policy rates to support the Eurozone’s anaemic economic growth. Politicians may ignore what central banks will do, but the market won’t: interest rates are still a key determinant of market dynamics.
Fourth, markets are euphoric, possibly close to “irrational exuberance.” It is obvious that markets are celebrating the beginning of an era with high expected growth, reduced geopolitical concerns, and increasingly accommodative central banks, on the back of falling energy prices and headline inflation. They are riding this dangerous tiger, as one has to do in these circumstances. But they also need to be cautious, since tigers are unpredictable, and can easily turn against those who try to tame them. This is because the policies and circumstances described above may be inconsistent one another, as is well reflected in the rise of long-term yields, in the US and elsewhere, and in the strengthening of the US dollar. Both conditions may lead to a correction in US and global equity prices at some point, which would leave investors very disappointed.
