The Great Instability: Five Lessons – The Learning Continues

The Great Instability is the label we chose last year to describe the fragility of modern society. From the outset we thought that the coronavirus pandemic fitted naturally within this framework, rather than being an anomaly or a break from the norm.

The original paper, written in March, addressed this theme through five lessons. Here we review what the last six months have taught us about The Great Instability and reflect on each of the five key lessons.

1. The risks that lurk in the left tail: our core belief was that the pandemic should not be seen as an exception to the rule, but as the latest in a long line of shocks. While this remains true, the sheer scale of the economic collapse prompted by the crisis makes 2020 stand out. And the impact of this rollercoaster ride is still underway, as pre-pandemic levels of activity are unlikely to be revisited until both a vaccine and sustained policy stimulus are in place.
2. A fragile ecosystem: the pandemic has provided a wake-up call, to business and governments alike, about the fragility of our current complex, interconnected and increasingly globalised economy. Concern surrounding the resilience of supply chains has been a catalyst for the widespread re-shoring of key industries. The rise of tele-working has added to this fragility by amplifying industry’s reliance on technology.
3. A role for the state: in liberal, free-market democracies the pandemic has forced the state to grow in stature through crisis management, the mobilisation of resources, the provision of fiscal intervention and by fundamentally re-shaping the way we lead our lives. While these actions have been necessary to save lives, it is clear that some governments have tackled this more efficiently than others. Patrician states appear to have been better prepared than populist administrations, but the much-anticipated distribution of a safe and effective vaccine may be the true test of this hypothesis.
4. The only game in town is over: we previously argued that central banks had largely exhausted their monetary ammunition prior to the pandemic and this prediction has been borne out by events. Interest rates were cut, where possible, and additional bond purchases were effective in restoring calm to dysfunctional markets. But projections suggest little further action from developed market central banks is possible, with unemployment expected to remain too high and inflation too low for a sustained period of time. Instead, the role of central banker has been relegated to passionate cheerleading for fiscal stimulus.
5. The day after tomorrow: the coronavirus outbreak has already caused profound changes to society, but the longevity of these changes remains unclear while the crisis is still with us. That said, tele-working looks set to become the new normal and this shift from city-based working is likely to fast-track other social changes. Meanwhile the rapid expansion of central bank balance sheets, in support of increased fiscal spending, is raising questions regarding the sustainability of debt levels. An end to the current era of monetary dominance could spark inflation fears and a severe correction in asset prices.

Our thorough and complex review of these five lessons concludes that instability will remain the dominant theme and investors will, therefore, need to take a long-term view. This suits us, because at BNP Paribas Asset Management we’re used to investigating before investing and looking at things from different angles. To read Richard Barwell’s latest white paper in full, which assesses each of these five key lessons in more detail and reflects on The Great Instability and the impact of COVID-19, please click here.