Market strategists and policymakers are putting too much emphasis on a trade deal between the United States and China, and it’s quite likely that whatever is agreed will disappoint. Read More
The G20 Summit is likely to generate many headlines and few concrete measures. However: Read More
There is absolutely no need for a rate cut.
Consumer confidence is high, unemployment is low and Treasuries’ yield is at 2.1%, while credit to the economy and corporate financing are not suffering.
The weakness in core consumer prices in May, which increased by only 0.1 %, was entirely due to lower prices of used vehicles, and core CPI inflation remains within the Fed target, falling from 2.4% in mid-2018 to 2.0% in May. Headline CPI inflation fell to 1.8% in May due to lower energy prices, so there is absolutely no logic in a rate cut. With unemployment at 3.6%and annualized GDP growth expected to remain above 2.3%, demands for a rate cut are only an excuse to keep financial asset prices higher at any cost
There are some elements that point to a slight weakness in the economy but no need for a rate cut.
- Industrial production rose 0.4% m/m in May while it stalled in other global economies.
- A strong 0.5% rise in underlying retail sales in May, along with upward revisions to previous months’ gains which means consumption is likely to grow close to 4% annualized in the second quarter.
- The headline confidence index declined marginally to 97.9 in June, from 100.0, but remains at very high levels.
A rate cut would only fuel the debt bubble further, and leave the Fed with fewer tools to address a slowdown. When so-called “High Yield” means 365 bps for junk bonds of companies close to bankruptcy and Treasuries yield 2.1% there is no reason at all to cut rates. Rather the opposite.
The debt bubble is dangerously inflated and lower rates would only make it worse. The ratio of US corporate debt to GDP, as well as the high-risk loan figure and securitized debt, have risen to pre-crisis levels. US deficit is rising because spending soars and the government finds debt cheap and abundant. Government spending rose to $440 billion in May 2019, up 21% from May of 2018. Yes, up 21% from May of 2018. All this despite record revenues. Receipts increased to $232 billion, up 7% from the same month last year.
A rate cut would only create a larger problem in the future. If the already dangerous corporate and sovereign debt bubble grow significantly more, no monetary policy will prevent a debt crisis.
In these weeks we have read a lot about the so-called trade war. However, this is better described as a negotiation between the largest consumer and the largest supplier with important political and even moral ramifications. This is also a dispute between two economic models.
Nobody wins in a trade war, and tariffs are always a bad idea, but let’s not forget that they are just a weapon. Read More
In this fifth episode of my video-blog, we discuss the mistake of believing GDP as the key driver of economic growth, as it is not difficult to inflate via debt.
We also discuss the differences between the US, China and EU, and why the slowdown in the Eurozone should concern us more.
Argentina has been “printing money for the people” MMT-style for many years. Its wrongly-called “inclusive monetary policy” of the past -print money to finance massive government spending- has driven the country to massive inflation and depression.
In this fourth episode of my video blog, I explain the economic slowdown, why central banks are not understanding the key global trends and what they mean for inflation, growth and productivity.
Do not miss the other episodes. Thanks for watching!!
Third Episode of my video-blog World Economics. Thanks for the success of the other episodes. This month we speak of the global slowdown and the poisoned solution of more stimuli and “a new deal”
What happens when politicians see that their monster stimuli have not delivered? They bring the next rabbit out of a hat. They need a new name and a new magic solution to make citizens believe in the magic of demand-side policies despite the constant failure of those same plans. Read More
Talking in CNBC about the 2019 outlook
The central idea is that we are in the process of a change of cycle that central banks and governments are unlikely to disguise because both monetary tools and fiscal space have been exhausted. This change of cycle may not lead to a 2008-style recession, but more likely to a Japanese-style stagnation as debt continues to rise while economic and productivity growth weaken. As such, we as investors may believe the mirage of a chain of “bullish” headlines in the first part of 2019: a trade deal between the U.S. and China (likely), a large China stimulus (very likely) and central banks’ relative dovishness (highly likely). This may create short-term bounces, but the euphoria effect many quickly fade because even with a bounce in global liquidity, net financing needs may exceed real growth. If markets react quickly and aggressively to these “false” bullish signals increasing risk and leverage, the probability of falling into a 2008-style crisis increases. Liquidity is falling, and this may reduce this risk of abnormal bullishness.
- Eurozone slowdown worsens. After a moderate slowdown in 2018, the Eurozone economy is likely to enter a period of stagnation as France, Italy, Germany and Spain post weaker growth figures than expected. The likely rise in bond yields may also affect credit growth. Governments have completely abandoned any reform agenda and the rise in public spending combined with lower tax revenues and growth might erode the confidence in the solvency of the Eurozone major economies. Brexit is likely to be a minor factor in this slowdown. The largest impact is probably going to come from weakening consumption and industrial output. Weak commodity prices may help the Eurozone avoid a recession, but credit risks will probably intensify as the effect of ECB purchases ends and political unrest rises.
- Brexit impact becomes negligible on the UK economy. The process of exit from the EU is unlikely to create the doomsday scenario announced by many as the dynamism of the exporting industry, the strength of the labour market and the comparatively attractive taxation versus global peers generate a better growth environment for the UK.
- Commodities rebound only to fall again on China failed stimulus. There will likely be a trade agreement between China and the U.S. that may help energy commodities as well as base and industrial metals short-term. However, markets focusing on this trade agreement catalyst are likely to be disappointed into the end of the year as the evidence of debt saturation and structural factors behind the economic slowdown of China become more evident. The headlines of a massive stimulus and a trade agreement will probably drive growth estimates to overoptimistic levels that may need significant downgrades as the reality of disinflation and global slowdown becomes more apparent.
- Gold rises as liquidity dries up and currencies weaken. Emerging market concerns are likely to rise again as the recent calm is tested by large U.S. dollar denominated maturities. Emerging economies have increased their imbalances—both fiscal and trade deficits in many countries—throughout 2018. There is very little that most governments want to do to avoid the increasingly demanding net financing needs. As the optimism about growth and Federal Reserve dovishness fades, we are likely to see the central banks of most emerging economies letting their currencies devalue in order to maintain foreign exchange reserves.
- U.S. economy avoids recession but slows down. The government shutdown will not generate a massive impact on the economy, and steady flow of capital into the U.S. economy is likely to drive a moderate slowdown that avoids recession thanks to a stronger and more dynamic economy than the European, Japanese and Chinese. Low oil prices and a strong dollar are needed to avoid recession. If the Fed capitulates and halts the announced rate hikes, we might see a temporary bounce in risky assets and investors retrying the reflation trade, but only to see another year of two halves where flight to U.S. assets is likely to accelerate once investors find that the headlines of trade agreement, Fed dovishness and Chinese stimulus are not as bullish in terms of growth and global demand as needed to keep the U.S. dollar carry trade ongoing.
- The biggest positive scenario for 2019 would be that central banks maintain their promises of normalization and the economies gradually strengthen driven by savings and productive investment.
- The biggest negative scenario for 2019 is that economies believe that 2018 was an anomaly and fall into the trap of believing, like in 2008, that a China stimulus will prevent the change of cycle.
