Home / Opinion / Columns /  Fears of fire and ice mark markets with poetic precision
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Some say the world will end in fire,

Some say in ice. 

From what I’ve tasted of desire 

I hold with those who favor fire.

But if it had to perish twice, 

I think I know enough of hate

 To know that for destruction ice 

Is also great And would suffice.

This short but exquisite poem by Robert Frost appears to capture the global economic moment we live in with poetic precision. On one hand, markets are obsessed about runaway inflationary fire brought about by central banks that overacted in response to the pandemic. On the other, markets seem worried that the withdrawal of monetary stimulus, continued rolling lockdowns in China and a reduction in discretionary income will result in recessionary ice.

First, a little history. The fire and ice debate in economics was kindled in the 1990s by a series of duelling columns by two legendary Morgan Stanley thinkers, Barton Biggs and Steve Roach. Roach fretted that the rising public deficits of the West would stoke a bonfire of inflation, while Biggs countered that a surfeit of (cheap) Asian labour and the speed of technological innovation would unleash a torrent of ice. As a young analyst who worked for the now deceased and much missed Biggs, I observed this duel from a ring-side seat. With hindsight, Biggs got the better of the debate at that time, but the duo gifted the economic world an enduring poetic framework. If it had not been for the extraordinary response from the Ben Bernanke-led Federal Reserve, the Global Financial Crisis of 2008 might easily have led to an ice age. That markets often get the calibration wrong was clear when the taper tantrum of 2013, caused by the US Fed’s announcement of a reduction in bond purchases, resulted in carnage in the equity and currency markets of emerging countries.

The correlation between equity and bond markets is the underlying phenomenon in the fire-and-ice framework. Because of its long history, I base the following observations on the US market. For about 40 years from 1960 onwards, the correlation of stocks and bonds remained positive; when bonds went down in price, stocks did too. For the last 20 years, this correlation has been mostly negative, offering investors an inherent diversification option by holding both assets at the same time. In 2022, this correlation has turned positive, with a sell-off in both stocks and bonds at the same time.

Economic theory postulates that equity and bond risk premia rise (causing markets to fall) when expectations of inflation rise. The joker in this pack is what the operative central bank does, the US Fed in this case. If the Fed tightens, thus anchoring long-run inflation expectations in a certain range, then stock/bond correlations will turn neutral or negative. Empirically, the inflation range that the US market has been comfortable with is between 1.5% and 2.5%. Inflation below that level triggers fears of ice, and above it, a fear of fire.

So, the market today is not as concerned about runaway inflation or a deep freeze as the uncertainty over whether the Fed with its hands on the monetary joystick can “land the plane" in the comfort zone. The fire-and-ice ranges broadly hold for the European Central Bank and Bank of England too. While the actions of these central banks do impact emerging markets, it is difficult to establish empirical ranges for each of these markets, given their short histories.

A mini taper tantrum is already playing out with the US dollar gaining against most currencies and global capital returning to safe-haven US treasuries. This phenomenon is likely to accelerate when the Fed this week begins to reverse its balance sheet expansion, a process called quantitative tightening. The Fed will achieve this by “not rolling" over $30 billion per month initially of securities held in its open market account, and then stepping that up to $60 billion per month.

With lockdowns in China, markets there fear an ice scenario. Policymakers recently announced 33 stimulus measures to shore up its economy. The Chinese policies include tax relief, fee reductions, value added tax credit rebates, deferment of social security premiums, loan payment deferrals for small businesses, and its usual “go to" measure of increasing infrastructure spending. If China is to meet its stated 5.5% economic growth target this year, it may need to undertake an outright cash transfer stimulus. The measures taken together appear anachronistic in the context of other parts of the world that are battling inflation.

India is somewhere in the middle. It has been importing inflation through oil and food prices and through other supply chains that are international in character. Domestic monetary inflation has been modest because the government did not overextend that lever to combat the pandemic. Except against the US dollar, the rupee has generally held its ground over the past year, and the Reserve Bank of India has enough dollar reserves (now just over $600 billion) to manage an orderly exchange rate evolution.

Cogent central bank action and structural technology-based productivity, I believe, would bias the longer-term outlook toward a “soft-landing". Nevertheless, markets are likely to remain volatile for the foreseeable future as they oscillate between fears of fire and ice.

P.S: “Don’t sacrifice high returns for lower volatility," said Barton Biggs, extolling the virtues of patience in markets.

Narayan Ramachandran is chairman, InKlude Labs. Read Narayan’s Mint columns at

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