 We have a situation where the discussion about fiscal policy is more about how aggressive should it be, what exact composition should it entail, rather than okay, should we have fiscal austerity. There's not a lot of people advocating for fiscal austerity now, certainly not people who have an important voice. So this is like a big paradigm shift. My name is Jens Nordvik. I currently run a company called Exante Data that I founded in 2016. We do data-driven analysis. You can call it economic analysis or capital flow analysis. There's different aspects. Over the last year, essentially since January 20, we've done daily COVID forecasting as well and not something we did and planned to do, but we had to do that because that was the one thing that was moving the economy and markets. So in general, we try to have a data-driven approach to what we do, but we're not machines. So in the team, we also have humans, and when you interpret data, the human judgment can be very important. We see it all the time that if you assume there's some kind of linear relationship between what's going on with certain indicators on the economy and markets, you're going to be run over. There's going to be breaks in those relationships all the time. We had a big shock that started in China and was a big shock, and the Chinese economy shut down, but for a period of time financial markets assumed that it was going to be sort of an isolated Chinese shock and not really a global shock. It was actually pretty strange because we were tracking this very carefully and we could see, okay, now it's not Chinese anymore, it's happening in Iran, right? Then when it came to Italy and the Italian economy shut down, then I think it was clear to everybody this was going global, and then it didn't take long before it really took US markets down, even before we had many cases recorded because we didn't do any testing pretty much. And then March obviously was an epic move in terms of shutdown in the economy, starting and financial markets going into total free fall. And then a lot of people started to think, okay, this is sort of another global financial crisis, and some things looked similar and some things looked totally different. Like one of the things that people were concerned about is, oh, okay, the bank's going to be in trouble, right? That was sort of the epicenter of the 2008 tension, and really there was really no bank-specific stress at any point in this cycle. And then the Fed stepped in, getting rates to zero just super, super quickly, and also starting to expand its balance sheet very, very aggressively at a pace we just haven't seen before, like buying bonds and other securities at a very, very aggressive pace. And not just that, also putting in place all these backstop facilities to backstop credit broadly, high yield credit even, which was very controversial at the time, of nuisible bonds. So it was just like an alphabet soup of all these different facilities. Nobody could remember them because they came out so quickly. But it worked, and a lot of facilities weren't even very used because they came so quickly that confidence didn't manage to deteriorate to a degree where huge amount of purchases were needed. And in the currency market, you also, at the height of the panic, started to see very sort of bizarre moves almost, where the safe haven currency, the Japanese yen, started to weaken against the dollar. So it was like some of that resembled 2008, where there was sort of dollar shortage, dollar hoarding that took place for a short period of time. But the Fed also managed to fill those gaps with swap lines. So really, it was in a remarkable shock that on many metrics looked like literally one of the worst shocks we have seen, we call it a hundred year pandemic for a reason. But also the Fed just stepped in and really managed to avoid a negative sort of confidence spiral, and they managed to circumvent those mechanisms much more effectively and much more quickly than what was the case in 2008, 2009. And then we started to see recovery in markets and recovery in some types of economic activity later on, but really financial markets really never looked back. Like we've had some ups and downs, right, but really the notion that markets bottomed at some point in March 20-something and then started to recover, it's been just incredible right since then. Not all markets have rallied at the same time, but we got control of sort of the plumbing of the financial system, the treasury market calmed down quickly. The most important credit market started to calm down quickly. It took much longer for, for example, emerging markets to start to recover. And I would say the last sort of leg of this financial market recovery really started in November, where we started to get the positive vaccine news, and people could start to really calculate, OK, if these vaccines are coming, like when are we going to actually have like the final descent in cases? I wouldn't say that we can say for sure we have that in, but people can say, OK, even if there's a little extra wave as the new strains come into play, we know the vaccines with high probability they're going to take care of that by the spring, and that's what we really have started to see a big recovery in all kinds of growth-sensitive assets, including emerging markets. So I think what the last asset class that has really started to be impacted by this is emerging market growth assets, and we've seen those outperform. Not only are markets looking at the recovery and growth-sensitive assets coming back to life, but we're also starting to anticipate that at some point they will actually have to be a policy response to take care of too strong growth. It sounds like almost bizarre that at this point in time where we have so much spare capacity, unemployment is still high. If you look at employment to population ratio, even more slack is evident on that type of measure, and nevertheless, because the vaccine rollout is perceived to be so important, and fiscal stimulus is really coming into the equation, the market is starting to look forward aggressively to a cycle that's going to be much more aggressive down and up than really we've seen before, and therefore necessitating some adjustment of interest rates over a period of time. It's a pretty incredible setup. This is another thing that's very different about this cycle compared to previous cycles. The Fed has communicated that they essentially want a degree of inflation overshoot, so it's been common around the world for the last couple of decades to have explicit or implicit inflation targeting, and almost all central banks set essentially 2% as the target. And now the Fed has communicated they want to have some idea of average inflation target, meaning that if we've been below 2% for a period of time, we are okay with the overshooting. And the reason why the Fed went down in that path when it was announced in the autumn was that they wanted to reduce the risk of being trapped at the lower bound, whatever that is, zero or something that's slightly different from that. And they wanted to essentially have a forward guidance that was more powerful. So this is potentially very important to the inflation outlook, like if we know the Fed is not going to be preemptive, if they know they won't have slightly above 2% inflation, that's important. And the other thing that's important about their framework is how they've announced that it's going to be implemented. So they've announced that it's going to be implemented in a way where they are only going to react once realized inflation has been above 2% and perhaps with some additional margin above 2% for a period of time. And the reason why this is important, it sounds like a kind of technicality. But if you think about how we've been coming out of previous cycles, it's always been the case that once the economy started to look a bit better, you had a certain group within the FMC that was more hawkish than others. They started to say, oh, now we need to be preemptive and we need to sort of make sure we don't act too late. That debate is essentially pushed back now. It's in the background in the sense that they've agreed on a framework where it's not so much the individual FMC member's forecast that are important. It is what we actually realize. And that means that the liftoff in terms of rates, tapering a slightly different issue, but the liftoff in terms of rates, should be later. And this, I think you can already see it in the yield curve, that the very short end of the yield curve is perceived to be very well anchored. And it has been very well anchored. And all the action is in the longer end. And just theoretically speaking, obviously if the Fed is not preemptive, in a way, we should have bigger moves in the long end. And that's kind of what we're seeing. We should not forget that this is not only about the Fed, right? So this cycle, as I said already a couple of times, we only had a couple of minutes here, but I said a couple of times, but I'll say it a few more times probably, like this cycle is really pretty extraordinary. There's the nature of the shock, there's what the Fed is doing, but perhaps the most extraordinary piece is the fiscal piece. We're adding up these numbers. These are just incredible numbers, well above $4 trillion, above 20% of GDP. If we go back to 2009 when there was an extraordinary need for stimulus, the economy and financial markets were in tatters, now what we're looking at is something that is free times that. So the amount of stimulus is extraordinary and you can listen to Treasury Secretary Yellen now when she talks about, okay, when are we going to go back to full employment or at least employment that was similar to what we had before this shock. We talk about it sometime in 2020. So within a relatively short period of time, one year from now, there's an expectation amongst policy makers that we can get back to essentially having eliminated that spare capacity in the labor market. It's just an extraordinary situation and I think when you think about the inflation outlook, that's something we haven't tried before. There's a couple of other things we haven't tried before. We've never seen a situation where the service sector, a big part of the service sector is essentially shut down. What's going to happen when it opens up? Like what kind of capacity does that sector have? That's just a big unknown. Another big unknown is that all the fiscal transfers to households and businesses that have occurred have been of a size where a lot of consumers, essentially, were not able or willing to spend that cash transfer. We have massive savings and we tend to call it excess savings because it's really like beyond what is normal. Depends a bit on how you measure it but at least $1.5 trillion are sitting in very liquid type of instruments that can really be deployed once feels like, yeah, okay, you can go out and consume the things you actually want to consume because those sectors have reopened. So like how strong is demand going to be once you have reopening? It's like a function of the new stimulus that's coming but it's also a function of this excess savings that has been accumulated already and there's just really no precedent for this. And then there's the issue of, okay, if the pressure, the extra demand is really in the services sector, how does inflation really work in that sector? It's a tricky thing. So maybe I'll do a plea to your young scholars here like because if you try to think about, okay, what research has really been done on how do prices in the service sector really respond to demand? There's almost no research in this area. This is not something that has been attracting a lot of attention in academic fields. So I think there's really a need to look at that carefully. Like what is the risk of inflation in the services sector? Clearly there's potential for like some volatility in demand and a spike in demand that is unprecedented. How are prices going to respond to that? That's really important to inflation outlook. I have some views, but like often when you form a forecast, you go and check, okay, what's the best academic work? It was pretty hard to find the working circuit. This is our best in class academic work. So I think that's something that's really missing from the research agenda here at this point. The sort of fiscal conservatism that has been a part of the narrative of economic policymaking, IMF advice, the way the European Union is set up and certainly debate in the US tea party and so forth, that fiscal conservatism, whatever form it took, it's just radically diminished or eliminated from the debate, right? So we have a situation where the discussion about fiscal policy is more about, okay, how aggressive should it be? What exact composition should it entail rather than, okay, should we have fiscal austerity? There's not a lot of people advocating for fiscal austerity now certainly not people who have an important voice. So this is like a big paradigm shift and it's important to think about, okay, this shift that has taken place, is it just because the COVID shock is so big that there's sort of a new political reality around that or is it a more permanent shift? If you're gonna forecast inflation, that political dimension, I think it's gonna be really important, right? If we knew there's gonna be fiscal stimulus that is gonna be well beyond the COVID relief packages in the US and Europe and so forth, that really would put demand on a different trajectory and inflation potential on different trajectory. And maybe I'll just make an additional point on that, right? So we've been in a regime now for at least a decade, but you can argue two decades where monetary policy has been used aggressively but we have very few examples where aggressive monetary policy was actually able to really generate a significant inflation impulse. We've had a lot of examples of essentially failure to generate a very significant inflation impulse but not really very many examples if any at all where okay it worked. So why was that? Like that monetary policy that perhaps was very aggressive in Japan for example but also recently in Europe and in the US, it was mostly based on getting interest rates down to a very low level, whatever each central bank perceived as its lower bound being at zero and Europe slightly below zero and then combined with a form of QE. But this QE that was done in many different places was a type of QE that I think is important to sort of label. It was like an asset swap QE. So the central bank bought some assets, typically bonds, took those assets out of the market, injected central bank reserves. So there was this asset swap, right? But what happened to those reserves? Like what happened to that extra liquidity that was generated? Did it really impact the economy, right? It was a financial transaction and the idea was okay, now the banks are gonna have more ability to lend and so forth, that's gonna be second round effect but it was not a very direct impact. What we're seeing in this cycle is a much closer coordination between monetary policy and fiscal policy. So you've had a situation where the central bank has to generate the liquidity but at the same time, you've also seen that the fiscal authorities have literally transferred cash and you can argue that same cash that was generated from the central bank authorities to households, right? So it's not like in the end, if you sort of consolidate the fiscal authority in the central bank, it is not just the asset swap anymore. It is the liquidity injection that also entails the transfer of that liquidity to actual entities in the real economy that can potentially spend it. This is just a huge difference, right? So if you're forecasting inflation and just looking at what the central banks are doing alone, you're really missing the most crucial part of the picture here. There's always a debate about whether the dollar's reserve currency status is somehow in question, right? And it typically takes, this is the debate we've had for decades and clearly like the reserve currency status has not disappeared from one day to the other, but there are some things that are totally new and the one aspect is what's going on in China. So China for the first time in 2020 and into 2021 as well, has been able to attract a significant amount of foreign capital into its local bond market. This just never happened before like the bond market used to be closed and they opened up were not very successful, but for various reasons, yield advantage, inclusion and global bond indices and so forth, that has now happened literally 100, 100 billions of dollars that come into that market. So for the first time actually, there's a reserve currency element of the Chinese bond market that you can argue is important. The Chinese currencies also been starting to behave in a way that from a sort of correlation matrix perspective also makes it look like a reserve currency. It's very stable. It has an appreciating trend and when there's risk aversion in the market, when something bad is happening, it really doesn't weaken. It's incredibly stable in that situation. So the Chinese currencies starting to have more attributes that make it feel more like a real competition to the dollar and then there's also potentially a new piece coming into the equation, which is do a technology. So China is creating a digital currency. It's being tested actively around the country. It entails essentially consumers having a wallet of a type that is a central bank wallet where the central bank can inject this liquidity direct into citizens holdings and they can spend out of that. This has implications for how clearing is happening, how trade is settled, transactions are settled and China definitely wants to have a digital currency where potentially from a technological perspective, they can compete with the traditional sort of banking based settlement of dollars and euros that we've known for decades, but which is not blockchain based and not a digital currency based. So they might, because they're leading in that space, have an advantage in terms of essentially being the first to build a digital currency. And that could also create some advantages in terms of like attracting other countries around them to sort of use that as a more efficient way to settle trade. So that could be a part of the picture.