Eric Van Nostrand, Chief Investment Officer at Lazard Asset Management, posits that the global economy is entering a new supply-side era where supply shocks, often geopolitical in origin and rooted in physical realities, have supplanted demand as the dominant source of macroeconomic variance. He co-authored a paper titled "The New Supply-Side Era: The O-Ring Meets Geopolitics" with Peter Orszag, Noah Barbieri, and Layla McDermott, emphasizing that traditional economic models fail to capture the widespread impact of single points of failure in global supply chains. These shocks manifest slowly and unevenly, impacting prices months or even years later, requiring a fundamental shift in thinking for policymakers, corporate leaders, and investors.
Van Nostrand highlights that this new era differs significantly from the 1980s supply-side economics. The critical factors today are not marginal tax rates but rather shocks stemming from geopolitics, concentrated chokepoints, the productivity surge of artificial intelligence, and the physical and network interdependencies fostered by globalization, now exposed by great-power competition. Events such as the COVID-19 pandemic, Russia's invasion of Ukraine, tariff shocks, China's rare-earth export controls, and conflicts in the Middle East have repeatedly demonstrated the growing influence of supply shocks on the global economy.
He points to AI as a positive supply shock, contrasting it with negative shocks like the risks in the Strait of Hormuz, which he believes the market underappreciates in terms of persistently higher oil prices. Van Nostrand argues that conventional monetary policy is ill-equipped to address supply-driven inflation and shocks, necessitating modern supply-side strategies and targeted government interventions. He also notes that financial markets now anticipate supply surprises more than demand surprises, with long-term risk insurance becoming more expensive relative to short-term risk, indicating a shift in investor focus towards supply-side uncertainties. This is reflected in the increased term premium on government bonds, signaling greater uncertainty about long-term factors like inflation and fiscal paths.
Lazard's analysis, as discussed by Van Nostrand, underscores that supply matters more today due to its reduced elasticity, increased frequency of geopolitical and other disruptions, and the buffering of demand shocks through policy interventions. This calls for a new analytical framework that integrates geopolitical and regulatory factors into business and economic analysis, a concept they term "contextual alpha."
