Macquarie strategist Viktor Shvets has raised concerns that policy incompetence, fuelled by the rise of populism, poses the most significant threat to a global economy increasingly reliant on asset bubbles. Macquarie, a global financial services group, provides a range of banking, financial, advisory, investment, and funds management services worldwide. Shvets contends that while policymakers have historically averted crises by injecting capital, the crucial consequence of decades of asset bubbles is rising inequality and societal polarisation, which populist leaders exploit, leading to institutional erosion and policy missteps that could trigger economic “doom loops.”
Shvets identifies several critical warning signs for such an outcome. The first involves trade and real wars, exemplified by recent geopolitical tensions surrounding Iran, Russia, and Ukraine. Such conflicts heighten the risk of inflationary supply shocks, particularly concerning crude oil prices and dangerously low global diesel reserves. A second concern is recent attempts by US Treasury Secretary Scott Bessent to influence bond markets. His plan to buy back long-dated US bonds, intended to push yields down, drew sharp criticism from legendary investor Stanley Druckenmiller, who cautioned that governments defending prices against fundamentals invariably lose.
The third warning sign revolves around new Federal Reserve Chairman Kevin Warsh’s struggle to shift central bank communication away from explicit forward guidance. While some view investor complaints as entitlement, Warsh’s challenge lies in maintaining market confidence, which is essential to avert “doom loops,” as markets require clear policy signals. BCA Research anticipates the next significant moment for policy competence will be the US midterm elections in early November, where a potential Democratic victory could lead to discussions about tax hikes, a move bond markets might welcome for budget repair, albeit with a possible drag on economic growth.
Beyond electoral outcomes, BCA Research is also monitoring for supply shocks from wars, crises, or natural disasters. The ongoing El Niño weather pattern, for instance, threatens to push up food inflation. Monetary policy has limited capacity to address such shocks, and governments possess less fiscal room than before the pandemic. A fresh wave of inflation would further compound the world’s populist drift, exacerbating the risks highlighted by Shvets.
