Northern Trust: Random Thoughts

by Carl Tannenbaum, Ryan Boyle and Vaibhav Tandon, Northern Trust

Editor’s Note: Our team generates a lot of ideas and impressions, not all of which are worthy of a full essay. To clear our notebooks entering 2025, here are quick perspectives on a range of topics.

• At this time last year, we were buckling up for a series of impactful elections. The coming 12 months won’t be nearly as intense, but voters in important countries like Germany, Canada, and possibly France will go to the polls in 2025.  With anti-establishment sentiment and economic challenges still prominent, incumbents are likely to have another bad year.
• At the beginning of the last decade, the debt crisis faced by the euro area led to speculation that a member would leave or be excused. (Remember “Grexit”?) By the end of the decade, happily, that risk had subsided.

Unfortunately, fiscal and political stress in Europe has returned with a vengeance.  The common currency will almost certainly face a new round of uncertainty in the years ahead, and the departure of a component country (potentially a substantial one) by the end of the decade cannot be ruled out.

• Expect some governments around the world to challenge the 2% inflation target established by central banks.  Achieving that target may require keeping interest rates higher for longer, which will be expensive for national budgets.  Higher inflation reduces the real value of debt and makes servicing it a bit easier. “Why not 3%?” is a question we may hear more often.
• While the exact makeup of U.S. fiscal policy next year remains to be seen, the electric vehicle (EV) tax credit may be on the chopping block.  That will almost certainly crimp demand for EVs and slow momentum in developing the infrastructure they require.

  But the rest of the world has a healthy appetite for EVs, and China is producing some very good models.  If the U.S. government de-emphasizes this segment, American automakers could find themselves at a disadvantage in serving the fastest-growing sector of the global vehicle market.

• • Whether you have been enjoying the cricket matches between Australia and India, the Christmastime fixtures from the English Premier League, or the college football playoff in the U.S., it is difficult to disengage the pure spirit of sport from the money that surrounds it.  The pressure on athletes (including American undergraduates!) to justify the money they are making can be overwhelming.

    Sometimes, business and pleasure don’t mix well.

• The U.S. played a leading role in creating multinational institutions and has continued to support them over many decades. But American leadership is flagging. The incoming U.S. administration is planning for an immediate withdrawal from the World Health Organization and the Paris Climate Accords.

America’s exit will leave some global organizations without a main source of funding, denting their ability to tackle world emergencies.  Extreme outcomes will become more likely.

• Many traditional holiday treats require eggs.  Those indulgences were especially expensive at the end of last year: prices have flown upward again amid an outbreak of avian influenza.  Flocks must be culled to stop the spread of the disease.

Eggs carry a very small weight in the consumer price index, but they have a much larger hold on people’s perceptions of inflation.  Shoppers hold policy makers accountable, but you can’t put a value on public health. Oatmeal, anyone?

• • Janet Yellen will conclude her term as Treasury Secretary this month.  In all likelihood, it will close more than thirty years of government service, during which Yellen became the first woman to lead the Federal Reserve and the U.S. Treasury Department.  As an economist, policy maker, and role model, Yellen’s career deserves celebration.  If you want to read more about it, check out the biography Yellen written by Wall Street Journal reporter Jon Hilsenrath.
  • There is sometimes a thin line between spending and investment.  The U.S. government has been spending a fortune on infrastructure, technology, and energy efficiency…areas which will be critical to sustaining global economic leadership. Potential growth in America leads the developed world.

    As the U.S. and other countries seek greater fiscal discipline, they will need to do so in a way that doesn’t overly suppress the innovation that will be needed to remain economically relevant.

  • Containing immigration around the world may prove difficult.  War, economic hardship, climate extremes, and oppression will likely keep populations on the move in the years ahead.  In appropriate numbers, newcomers are essential to local economies, but excesses can create challenges.  Border control is not getting any easier, and the politics around it are getting more difficult.
  • Many think that the incoming U.S. administration will take steps to ease financial regulation. Traditional products and providers will face fewer restrictions, and alternative vehicles and channels (like crypto currencies and exchanges) will be allowed to advance.

    If history is any guide, however, relaxing standards raises the potential for systemic risks to develop.  Since the public is on the hook when crisis comes, care must be taken to maintain sufficient oversight and minimize moral hazard.

  • Societies across the planet are dealing with increased heat stress, and those that contribute the least to climate change are often the most impacted.  An international solution to the challenge is desperately needed.
  • Artificial intelligence (AI) seems to be advancing rapidly across fields of endeavor; the innovations are as eye-catching as they are productive.

One would hope that AI would be applied aggressively in the field of health care, a source of increasing expense for both families and countries.  But the lack of consolidated medical data, combined with restrictions on its use, may make it difficult to bend the cost curve in one of the world’s biggest industries.

• Speaking of AI, the three-day U.S. east coast dockworkers’ strike this past October ended with an interim agreement through January 15.  Difficult disagreements remain over port automation technology and job protection.  A strike to start the year remains possible, but at least it’s coming after the holidays.
• We get a lot of questions about overnight interest rates implied by futures markets, especially when they show paths that differ from our forecasts.  But investor expectations have been very poor predictors.  Markets came into 2024 counting on many more cuts from the Federal Reserve than we ultimately got.

  In addition, positions taken in futures markets can be very volatile, which diminishes their usefulness as a forecasting tool.  We look at them, but use them with a great deal of caution.

• A gentle reminder, perhaps a new year’s resolution, to explore your local library.  They have lots of material to choose from: fact or fiction, business or pleasure, hardbound or electronic. Resources that go unused will eventually go away.

  And if you are the sort to make new year’s resolutions, try harder to stick to them.  Studies show that less than 10% of the commitments that people make at the beginning of January are still being adhered to a month later.

We hereby resolve to continue bringing you economic news you can use in 2025.  Back with a standard issue next week!