Returning themes; Trump’s dislike of German Cars; Long wave economic analysis: A new ‘K-spring’ (up cycle) dawning?; Chinese central bank playing Whack-A-Mole with their economy?
Returning themes
US industry contrary to the stock market appears to not yet believe in Trump’s ‘America First’ agenda. Soft forward indicators like purchasing manager surveys may all be at very high levels, but hard indicators like durable goods orders (machine investment) or commercial loan growth have remained at the lower levels of last year.
Combined with the notable slowdown in China’s growth indicators and their reflection in softer energy and commodity prices this leads us to expect that the first phase of the ‘reflation’ cycle that started in the early summer of 2016 may be drawing to an end. By no means does this have to lead to a reversal back to where the state of the economy was at the beginning of 2016, but the so nicely synchronised growth picture around the world is crumbling somewhat.
Trump’s dislike of German cars – or: Trade deficit misconceptions
Of course, the new US administration’s underlying concern relates not only to US employment and a desire to ‘repatriate’ manufacturing and production, but the extent to which the US appears to be indebted to other countries (as a result of its continuing trade deficit).
Given that forecasts for US growth currently surpass those of many other economies, paying for imports that are in turn helping to fuel that US economic growth further does not imply that it is unsustainable. If nothing else, continuing growth provides the means for the US to address any further expansion of imbalances in trade by keeping the deficit level the same or even outgrowing it relative to GDP through faster GDP than account deficit growth. Absent imports, US businesses and consumers would simply not be able to satisfy the demand for goods that the strengthening US economy is currently experiencing.
Long wave economic analysis: A new ‘K-spring’ (up cycle) dawning?
We have repeatedly made investors aware that the strong investment returns (double digit) they have experienced over the past few years, even in lower-risk portfolios with a higher proportion of fixed income investments, are very likely to moderate back towards long-term averages (mean reversion).
We consider that we may actually be at the beginning of a new K-spring or rebirth of growth in the global economy.
Chinese central bank playing Whack-A-Mole with their economy?
The country’s credit binge has been remarkable in the years since the financial crisis. The total outstanding debt pile now stands at around 264% of the nation’s GDP, up from 164% in 2008. Given that China’s GDP has more than doubled in that time, it makes for an impressive stat, and it’s a growth in credit that outdoes even that seen in the US and the UK in the run-up to the crisis.
The central bank and the authorities would clearly want to curtail the credit excesses without causing too much disruption, but the extent to which this is possible is dubious. In truth, the PBoC’s hike in short term rates isn’t solely an effort to contain the debt situation. As mentioned, the bank’s rate increase last week came in quick succession to the Fed’s own hike. To preserve its foreign currency reserves China relies to a large extent on the fact that its comparatively high deposit interest rates incentivise investors to keep money in the country and, when US rates go up, this incentive drops.
The level of micromanaging that the authorities in China are engaging in (increasing short term interest rates, enforcing capital restrictions, etc.) renders their approach to regulating the economy like a game of Whack-A-Mole – hitting the “smaller” problems back down when they come up because dealing with the big problems is too painful.
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