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    The Intelligence from The Economist

    Cruel summer: Heatwaves rage across the world

    Mon Jul 17 2023
    Financial MarketsHeatwavesClimate ChangeTreasury BondsMarket VolatilitySUVsSmall CarsEurope

    Description

    The episode covers the complexity of financial markets, the impact of heatwaves and climate change, the relationship between treasury bonds and market volatility, and the rise of SUVs and decline of small cars in Europe.

    Insights

    Heatwaves and Climate Change

    Heatwaves have significant impacts on human health and are likely to become increasingly common due to climate change. Extreme weather events worldwide are also on the rise.

    Treasury Bonds and Market Volatility

    Increasing supply and removing the Fed as a buyer depresses treasury prices, causing yields to rise. This affects the attractiveness of riskier assets like stocks. Timing market corrections is difficult.

    Rise of SUVs and Decline of Small Cars in Europe

    Sales of small cars in the EU have fallen while SUV sales are up. The preference for larger cars is driven by affordability and changing family sizes. Europe is losing its automotive heritage.

    Chapters

    1. Financial Markets and Economy
    2. Heatwaves and Climate Change
    3. Treasury Bonds and Market Volatility
    4. Rise of SUVs and Decline of Small Cars in Europe
    Summary
    Transcript

    Financial Markets and Economy

    00:00 - 07:59

    • Financial markets are more complex than ever.
    • Goldman Sachs provides weekly insights on the key factors driving the markets and the economy.
    • Low interest rates over the past decade led to a speculative bubble in risky assets like Bitcoin and junk bonds, which has now burst.

    Heatwaves and Climate Change

    07:29 - 14:52

    • European streets are seeing a decline in popularity of small cars like the Mini, Beetle, and Fiat 500.
    • Wildfires have been raging in Spain's Canary Islands, Croatia, and Greece due to intense heat.
    • Record-breaking temperatures are expected in Europe and parts of America, with millions of people under heat advisories.
    • Phoenix, Arizona has been experiencing extreme heat for over two weeks straight, with temperatures exceeding 110 degrees Fahrenheit (43 degrees Celsius).
    • Heat waves across America, Asia, and Europe are likely influenced by climate change but may also be affected by other factors like El Nino.
    • Heat waves have significant impacts on human health including heat stroke, dehydration, heart and kidney damage, as well as potential effects on mental health.
    • A recent study estimated that as many as 61,000 people may have died from sweltering heat across Europe last summer.
    • Global sea temperatures in the North Atlantic are at a record high since April, contributing to current heatwaves.
    • High water temperatures in oceans around Florida and the Gulf of Mexico are damaging coral reefs and threatening marine life.
    • Extreme weather events are happening simultaneously worldwide, including torrential rains in India and South Korea, flooding in Vermont and Pennsylvania.
    • The extreme weather events seen this July are likely to become increasingly common due to climate change.
    • The severity of future extreme weather events depends on greenhouse gas emissions reduction efforts and adaptation measures.

    Treasury Bonds and Market Volatility

    14:24 - 21:17

    • Increasing supply and removing the Fed as a buyer depresses treasury prices, causing the yield on treasury bonds to rise.
    • Higher yields on treasury bonds make riskier assets like stocks relatively less attractive.
    • More investors end up holding treasury bonds, reducing their appetite for other riskier assets.
    • The VIX, Wall Street's fear gauge, has fallen to its lowest level since before the COVID-19 pandemic, indicating that investors expect calm markets.
    • Volatility may be low because different types of stocks are moving in different directions and canceling each other out.
    • A correction in risky assets could be inevitable due to unsustainable valuations and the potential for stock prices to become less attractive compared to risk-free rates.
    • Timing a market correction is difficult and waiting for it can result in significant losses.
    • European cars have traditionally been smaller and more fuel-efficient than American cars due to historical, geographical, and economic factors.
    • American cars tend to be larger and more suited for long-distance travel due to remodeled cities and suburbs that accommodate bigger vehicles.
    • European fuel duties are high, leading to a preference for smaller engines with better fuel efficiency.

    Rise of SUVs and Decline of Small Cars in Europe

    20:56 - 25:13

    • Sales of small cars in the EU have fallen by nearly half since 2011, while SUV sales are up.
    • The trend in Europe is towards larger vehicles, despite concerns about pollution and carbon emissions.
    • European families are getting smaller, but cars are getting bigger.
    • The preference for larger cars is driven by fatter wallets; people tend to buy as much car as they can afford.
    • Europe is losing a slice of its automotive heritage as small cars become less popular.
    • Smaller cars had a certain charm and nostalgia that may be lost with the rise of SUVs.
    • Sometimes smaller really is better, even if it means being cramped in the back of a mini.
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