Financial markets have of course endured something of a roller-coaster ride over the last four or five weeks and quite naturally this has led some to re-consider their perceived outlook for the global economy, interest rates and of course inflation.
As the author has travelled the world over the last 10 days, three things have become all too apparent to us
We suspect that the most popular ‘questions’ that people have with regard to the outlook for 2018 revolve around the extent to which the global real economic recovery will continue and just how many rate hikes the ‘new’ Federal Open Market Committee will need to enact in the USA over the course of 2018.
With earnest intent on the part of their organizers, many conferences were held in the immediate aftermath of the GFC in an attempt to marry the analysis offered by both academic and (albeit only a few) practical economists in the hope of producing a new approach to economics that might be better able to explain the perceived new world order.
The economics profession has always struggled to define the notion of value – and not only within the narrow context of the financial markets!
Perhaps the biggest surprise that emanated from this week’s trip to North America has been the extent to which the topic of secular stagnation has come back onto the agenda, despite all the excitement over the prospect for as yet unfortunately still undefined tax cuts by the Trump Administration.
We suspect there is a sense in financial markets that China has escaped the banking crisis / credit crunch / balance of payments crisis / economic slowdown that the Cassandras have long been predicting. Moreover, we suspect that it is further assumed that this escape was facilitated through the use of direct controls, state planning and of course the heavy-handed imposition of capital controls. It is of course somewhat ironic that the notionally ‘free markets’ of the global financial system have found themselves applauding China’s decidedly state-controlled economy quite so enthusiastically but markets were ever-fickle…...
Over the last two months or so, we have travelled quite widely and one factor that has stood out during our travels has been the on-going and seemingly widespread relative weakness in household income trends.
It has been our firm contention that financial market liquidity has been booming over the nine months or so, albeit for what might be described as technical rather than strictly official policy reasons. Furthermore, we would fully attribute the recent gravity-defying – and bad news-defying – behaviour of financial markets to these strong liquidity trends. In fact, we would go so far as to suggest that global financial market liquidity conditions have been as lax as at any time since the mid-2000s over recent months.
Given the background noise that is always present within financial markets, and which can from time to time confuse even the most seasoned of investors, every so often it can be useful to consider longer term – and relatively simple - charts in order to regain some form of perspective.
Despite the country’s apparent export prowess and its persistent trade surpluses over the last twenty years, we estimate that the Chinese corporate sector is currently running a financial deficit (i.e. the financing gap between in current expenses plus CAPEX and its current revenues) of between US$1.5 and US$2 trillion per annum.
We joined the ‘financial world’ in 1987 when inflation had in theory at least been conquered and the Asian Tigers had emerged to become significant parts of the global trading system.
President Trump apparently opted for a more measured tone in his first address to Congress but we are beginning to wonder if his economic policy can be summarised as being an intention to launch a large fiscal expansion behind not just a physical wall but a tariff one as well.
Faced with jetlag and having reached saturation with CNBC and CNN in the hotel room, I found myself watching an out-of-sorts Andy Murray playing in a match that on paper he would have been expected to win. Even though the commentary was in Mandarin (my knowledge of which is limited to around 4 phrases), it was clear that Murray was struggling to gain the initiative and he was being bounced around the court by his opponent but it seems to us that China’s economic policymaking has entered a similar phase vis-à-vis the management of its economy.
Whether by luck or design, when I first entered the world of applied economics during the mid-1980s, I decided that I would like to specialize in covering central banks and in studying the flows that these institutions could create within financial systems and the real economies of the world..
Of course, we have nothing resembling an ‘inside track’ on whom Trump will appoint to his Administration over the next few weeks and precisely what new policies Trump will in fact be able to introduce from a practical perspective – or over what time frame these might occur.
Over recent weeks, many analysts around the world have become more optimistic over the outlook for world trade and this view has apparently been helped by some – although by no means all – of the most recent Asian trade data and by a partial rebound in PMI (Purchasing Managers’ Index) data in Europe and the USA.
Despite having recently spent an interesting week on the East Coast of the USA, we can safely say that we still have no idea who will win the Presidential Election.
Having conducted a significant number of client meetings over recent weeks, one feature that has struck is that amongst this, albeit probably rather biased, sample group, there would seem to be a distinct desire to sell risks – although few people have actually done so yet.
At -3% in year on year terms, China’s published rate of reserve money growth appears exceptionally weak and certainly far at odds with the ECB’s 40% rate of base money growth or even the Bank of Japan’s 26% YoY rate.