GSE Report

GLOBAL SLOWDOWN?

We see an extension of the business cycle as crucial for further gains in risk assets. With valuations no longer cheap and corporate profit margins under pressure in many markets, economic growth is needed to boost revenues. We expect little or no price appreciation in fixed income and only muted gains for most equity markets in 2016.

China’s economic deceleration and shift to a consumer-driven economy are putting the brakes on the global business cycle. Both are part of a natural evolution but pose structural challenges to emerging markets (EMs) and commodity producers. We expect China to muddle through. Risks, including a yuan devaluation, are rising — but we do not see them coming to a head in 2016.

The knock-on effects of movements in oil prices and the U.S. dollar are critical. Falling oil prices have dragged down long-term inflation expectations. This is puzzling and brings into question the credibility of central bank inflation targets. The dollar’s rise has led to some tighteningin financial conditions. Further gains would intensify pressure on U.S. profits, commodity prices and EM currencies.

Between 1950 and 2000, the U.S. economy grew at an average annual rate of 3.7%. It was a growth rate strong enough to build and sustain the world’s largest middle class. By 2000,median household income in America stood at $57,730 in 2014 dollars—an all-time high. But starting in 2001, U.S. economic growth shrank to an average annual rate of 1.9%. In only two of the last 14 years has growth exceeded 3% and not once since 2005. This is the longest period of prolonged slow growth in at least a century. By 2014, median household income stood at $53,900—a 5.9% decline from the peak.

"I think the world economy is bearing the brunt of the third wave of deflation in a decade. The first wave of deflation was the U.S. financial crisis of ’08’-09. The second wave of deflation was the Eurozone crisis of ’11-’12. This is the third wave, and its very much-centered around emerging markets. And, we’re seeing both a price shock, in terms of commodities, and we are also seeing a volume shock. I think the volume shocks are coming thru in the PMIs. We are probably quite close to a manufacturing recession in the world. And, we're seeing it work through cyclical components of the stock market. The one thing I’m not worried about is inflation."

Dominic Rossi

Global CIO of Fidelity Worldwide Investment

September 22, 2015

 

Developing Asia is expected to continue to be the largest contributing region to global growth despite the moderation, but there are a number of headwinds in play such as currency pressures, and worries about capital outflows. In order to be resilient to international interest rate fluctuations and other financial shocks, it is important to implement macro prudential regulations that, for some countries, may entail some capital flow management such as limiting reliance on foreign currency borrowing.

Shang-Jin Wei

ADB Chief Economist

September 22, 2015

 

In my view the global EM FX storm is not over. As we are just in the eye of the storm some market participants might have falsely thought that some days of lower volatility and EM relief are leading us “to a sustained EM FX rally”. But the storm is not over yet and will reintensify over the next couple of weeks with significant volatility and major declines for high yielding EM FX. The Brazilian Real, Chilean Peso, South African Rand and Turkish Lira will suffer most in this environment.

Bernd Berg

Societe Generale Strategist

September 22, 2015

Like the characters in Samuel Beckett’s Waiting for Godot, the world awaits the return of wealth and prosperity. But the global economy may be entering a period of stagnation.

Over the last 35 years, the economic growth necessary to increase living standards, increase wealth and manage growing inequality has been based increasingly on rising borrowings and financial rather than real engineering. There was reliance on debt-driven consumption. It resulted in global trade and investment imbalances, such as that between China and the US, Germany and the rest of Europe.

It is impossible to dismiss this terrible performance as a fluke of currency, unimportant, or transitory. Commodities are whispering “global slowdown” on a near daily basis and it would be a mistake to construe a deal for more stimulus in Greece or a propped up Chinese stock market as an ‘all-clear’ to put risk back on. Behind the scenes, and with vast breadth, this slowdown is gathering pace and is beyond the reach of central planners. Central bankers, largely influenced by the 1970’s high inflation, tend to worry only about inflation, but we would suggest they should worry more about deflation now.

 

Kessler Companies

July 20, 2015

Graccident

What we are seeing here is what economists call the sudden stop, when the payment system stops. The banks are closed. The stock market is closed. …The logic of a sudden stop is a massive economic contraction, social unrest and it’s going to make continued membership of the euro zone very difficult for Greece. ...There’s an 85% probability that Greece will be forced to leave the Eurozone not because it wants to do so but because it simply is no longer to stay in the Eurozone.

"The next recession will be massively deflationary and unlike anyting we have ever experienced."

John Mauldin

Thoughts from the Front Line

May 27, 2015

 

 

The level of indebtedness impacts economic activity.

Over the more than two thousand years of economic history, a clear record emerges regarding the relationship between the level of indebtedness of a nation and its resultant pace of economic activity. The once flourishing and powerful Mesopotamian, Roman and Bourbon dynasties, as well as the British empire, ultimately lost their great economic vigor due to the inability to prosper under crushing debt levels. …Through the centuries there are also numerous cases of less prominent countries that suffered a similar fate of economic decline resulting from too much debt as a percent of total output.

A recipe for another global crisis?

" Seven years after the global financial crisis, global debt and leverage have continued to grow. From 2007 through the second quarter of 2014, global debt grew by $57 trillion, raising the ratio of global debt to GDP by 17 percentage points. This is not as much as the 23-point increase in the seven years before the crisis, but it is enough to raise fresh concerns. Governments in advanced economies have borrowed heavily to fund bailouts in the crisis and offset falling demand in the recession, while corporate and household debt in a range of countries continues to grow rapidly."

Richard Dobbs, Susan Lund, Jonathan Woetzel and Mina Mutafchieva

McKinsey Global Instittute

February 2015

 

 

"We are in a world that is dangerously unanchored. We’re seeing true currency wars and everybody is doing it, and I have no idea where this is going to end.

Sovereign bond yields haven’t been so low since the ‘Black Plague’: how much more bang can you get for your buck? QE is not going to help [the Eurozone] at all.

There is a significant risk that this is going to end badly because the Bank of Japan is funding 40% of all government spending. This could end in high inflation, perhaps even hyperinflation.

The emerging markets got on the bandwagon by resisting upward pressure on their currencies and building up enormous foreign exchange reserves. The wrinkle this time is that corporations in these countries—especially in Asia and Latin America—have borrowed $6 trillion in U.S. dollars, often through offshore centers. That is going to create a huge currency mismatch problem as US rates rise and the dollar goes back up.

It ain’t over until the fat lady sings. There are serious side effects building up [from the Federal Reserve’s quantitative easing] and we don’t know what will happen when they try to reverse what they have done. They have created so much debt that they may have turned a good deflation into a bad deflation after all."

William White Former chief economist for the Bank for International Settlements

Advisor to German Chancellor Angela Merkel

January 21, 2015