In 2022 -the pronounced change in the macroeconomic paradigm- the global economy will see a move from deficient aggregate demand to deficient aggregate supply caused by quite persistent supply chain disruptions and labour shortages.
Further, the reducing exceptional monetary policy stimulus should lead to a significant tightening in overall financial conditions. This change has come in the context of high and persistent inflation.
Sophisticated investors will look more to developments in fixed income than in stocks to assess the degree to which financial conditions have started to tighten.
The markets would need unambiguous and overwhelming evidence of a durable change in policy before pricing it fully.
The real economy has not yet felt any contractionary impulses, markets have been relatively sanguine. The disconnect undermines the likelihood of a timely and orderly adjustment, thereby increasing the risk of a policy mistake and undue damage to livelihoods.
What is more consequential is when and how this will lead to a meaningful tightening of financial conditions and what the spillover effects will be for the global economy