BRICS and Boots: This Week’s Non-Events in Johannesburg and Jackson Hole

Alas, it seems we have entered a new phase of the dog days of August: the week when important people travel the world for big festivals of self-importance. It starts with the BRICS summit, where leaders of Brazil, Russia,^[i] India, China and South Africa will complain about traditional global economic institutions, debate whether to add some letters to their acronym and jawbone about creating their own currency. Then the spotlight turns to Jackson Hole, Wyoming, where the world’s central bankers will wear plaid shirts and use phrases like “term spread” and “natural rate of interest” a lot while staring at pretty horses and mountain vistas. No doubt you will see a boodle of stories on both, considering finance writers have had them circled on the calendar for ages as things to write about in a slow-news stretch. But do not confuse this attention with importance for capital markets: These are sideshows, and with precious few exceptions, they are bastions of navel gazing—not economic policymaking.

Of the two, we are most hard-pressed to see why the BRICS summit gets so much attention. This gang of disparate countries has little in common, and they came together chiefly because a former Goldman Sachs economist named Jim O’Neill observed over 20 years ago that Emerging Markets Brazil, Russia, India and China had mighty economic potential. He coined the initial acronym, BRIC, and soon it became a meme for investors hoping these hotshots would bring hot returns. A few years later their leaders met on the sidelines of a UN meeting, where they presumably shrugged, said everyone says we are a thing so hey why not just let ourselves be a thing, and soon they were holding annual summits. As a commodity powerhouse (Brazil), post-Soviet oligarchy (Russia), middle-income country with a vast informal economy (India) and a communist nation pursuing market-oriented reforms (China), they seemed to bond over their annoyance with the dollar’s reserve currency dominance and Western leadership of the World Bank and IMF. So they became an official group, holding official summits to discuss these things. In 2010 they admitted South Africa as a new formal member—and a new acronym was born.

Since then, O’Neill has always been among the first to point out that investors’ focus on this bloc is a bit silly given their divergent fortunes. Brazil’s economy remains commodity-dependent. Russia’s economy, whacked by sanctions and looted by oligarchs, has gone backward. India is ascendant but still grappling with age-old problems tied to protectionism and the informal economy. China grew a lot but also stored up some structural issues, with which leaders are now dealing while trying to mitigate side effects in order to keep GDP and employment growing. South Africa shares Brazil’s commodity dependence but suffers from deep corruption. Yet they still meet annually to discuss dethroning the dollar and push their World Bank and IMF competitor, creatively named New Development Bank.

This year, the top agenda items are whether to add new members and whether they might form their own currency, which we will nickname BRICSbucks. At least two dozen reportedly want to join, which is the strangest thing we have heard since European nations started trying to join the Trans-Pacific Partnership. Not that we don’t understand the appeal of joining an economic group that contains nearly half the world’s population, but there are only so many ways you can add members and maintain a snappy acronym. Will they pull an OPEC, steal a moniker from nearly every streaming video service in existence and become the BRICS+? Or add the MINT nations (coined by Fidelity over a decade ago to refer to the next wave of big potential in Mexico, Indonesia, Nigeria and Turkey) and call them the MINTy BRICS? Hey, maybe they can add Saudi Arabia, Bangladesh and the UAE and become the BRICS BUS! All aboard!

See, none of it means anything because this is just a diplomatic club. Not a trade group like South America’s Mercosur or the Association of Southeast Asian Nations (ASEAN). Just a bunch of countries who got together because someone said they should, discovered they had maybe two things in common, and decided to keep getting together same time, next year. And please don’t even get us started on the notion of these countries issuing a common currency to displace the dollar. One, their individual currencies are hardly international as it is, and many of them like it that way. Do you see China surrendering complete control over monetary policy and currency movement in order to birth a BRICSbuck? Do you think Brazil or India wants to potentially share in sharp sanctions by unifying their currency with Russia’s? Neither do we. And, some of the potential members have currencies pegged to the dollar they would have to ditch first, a potentially disruptive move for their economies.

Two, the euro has its issues, and those countries at least have deep economic integration with one another, roughly similar political systems and a shared culture to go with a nascent fiscal transfer union. If you think there is a snowball’s chance the BRICS will form the monetary and fiscal transfer union necessary to make a shared currency work, we have a bridge to sell you.^[ii]

So we think you can safely tune down all of the BRICS is reshaping the world economy thinkpieces that will inevitably hit the wires this week. You can probably do the same with the central bankers at Jackson Hole, though at least here we have the remote possibility of actual policy signals. In most years, Jackson Hole is an academic snoozefest with jeans and cowboy hats. But former Fed head Ben Bernanke had a habit of previewing his next move on the quantitative easing (QE) front at the annual conclave. Former ECB chief Mario Draghi also laid the rhetorical groundwork for ECB QE there. And three years ago, current Fed head Jerome Powell announced the Fed’s revamped inflation target in his virtual appearance.

Yet major announcements are more the exception than the rule at Jackson Hole. People tune in every year for some grand policy signal. Yet usually, it is just a bunch of economists groupthinking their way through various issues. This year’s theme is “Structural Shifts in the Global Economy,” where they will explore post-pandemic “aftereffects for how economies are structured, both domestically and globally, as trade networks shift, and global financial flows react.”^[iii] The agenda includes a bunch of brains sharing papers and, presumably, watching paint dry while policymakers drone on about whether the “neutral rate” of interest that neither stimulates nor cools economic activity has shifted over the years. From what to what they have no clue, but it won’t stop the speculation, we suppose. About the only entertainment will be seeing if any inflation-fatigued onlookers manage to egg anyone and playing “Jackson Hole Bingo!” with the delightful card concocted by some of Bloomberg’s funniest folks.^[iv]

In all seriousness, even if clear policy signals emerge, we don’t think it is a big deal for investors. One, monetary policy guidance isn’t a blueprint. Two, monetary policy changes have no preset impact. Three, monetary policy hits the real economy at a lag, giving investors time to assess the actual changes and what their probable effects will be. Four, too many people watch this for there to be any actionable, immediate investment implications. It all gets priced in far too quickly. Whatever hints you glean from any of the speeches, thousands of traders and bots will have already acted on them. There is no edge.

So if you like summits and thinktank hijinks, by all means, keep an eye on the BRICS and Jackson Hole for entertainment purposes. We won’t judge. But don’t extrapolate this to either being significant for the global economy and markets in the short or long term. It is all just a bunch of bored suits trying to make their own fun.