Update: Goldilocks Zone

Extract from the September 2017 quarterly report:

We have expressed the view repeatedly in previous commentaries that going for growth globally was the only sensible option available to policy makers in the major economies and thankfully it appears that this is succeeding. According to Christine Lagarde, the Managing Director of the International Monetary Fund (IMF), the world economy is gaining strength and extending the broadest recovery since the start of the decade. Global industrial production (IP) is currently growing at 3.7% year-on-year (YoY) with the recovery largely driven by developed markets (DM), as shown in chart 1:


Update: Pro-Growth Policies

Extract from the June 2017 quarterly report:

Since the global financial crisis of 2008, both global growth and inflation have responded very anaemically to unprecedented levels of monetary stimulus, these days known as quantitative easing or “QE”. The reasons for this are many and complex, and do not appear to be sufficiently understood by both politicians, their economic advisors and indeed ourselves. In US Fed chairperson Yellen’s recent testimony to congress she said the Fed was puzzled by the slowdown in global inflation and that it seemed sluggish price rises had structural causes. Mario Draghi of the ECB and German chancellor Merkel have recently made similar comments about the lack of effectiveness of monetary policy. Japan has already supplemented easy monetary policy with stimulatory fiscal policy.

Update: A Stimulatory US Should Prevail

Extract from the March 2017 quarterly report:

Although the European Union (despite Brexit) and China are major role players in the world economy, the US still retains a pre-eminent position as the world’s primary importing and consuming nation. As such, its fiscal and monetary policies have a greater potential to affect global growth than those of the exporting nations mentioned above. This is not to say that they are not important; they are, but the US is likely to remain the “lead steer” economically and the US dollar the global reserve currency for a while yet.


Update: Return To Reagonomics?

Extract from the December 2016 quarterly report:

While it is still too early to see if US President-elect Donald Trump practises what he preaches, if he honours his campaign promises in respect of fiscal stimulation (but not trade tariffs) we would view it as very positive from an economic point of view. If you refer to our previous reports, we have repeatedly referred to the need for a better balance between (austere) fiscal policies and (reflationary) monetary policies in the major economies. Until recently when Japan adopted a stimulatory fiscal policy to supplement its aggressive QE program, all major economies were effectively “driving with one foot on the accelerator and one on the brake”. Those who drive cars will realize that all this does is generate a lot of heat without going faster. This heat is analogous to lack of growth and loss of jobs which has directly or indirectly led to Brexit and the election of Trump. Europe is likely to experience something similar, e.g. the rise of arch right-winger Marine le Pen in France.


Update: Taps Off

Extract from the September 2016 quarterly report:

In our view it is incorrectly perceived that US monetary policy is still very loose, partly due to excessive focus on the FOMC’s policy target rate. Of far more importance are other market-related interest rates e.g. LIBOR (chart 1) which indicate that US monetary policy is not as loose as is generally perceived, something on which US Fed Chairperson Janet Yellen has recently commented.


Update: Stimulus & Austerity, an unlikely pairing

Extract from the June 2016 quarterly report:

Although the UK referendum vote to leave the European Union (“Brexit”) has been getting the headlines recently, the UK economy is less than 4% of global GDP. Of far more importance to the medium term outlook for global economic health is the stance of, and balance between, fiscal and monetary policies in the major economies. Over the past few years a serious mismatch between these two pillars of national economic policy has emerged, particularly in the Eurozone where fiscal restraint and austerity is being attempted against a background of high debt-to-GDP levels and aggressive quantitative easing (“QE”). George Soros has described the actions of US Federal Reserve chairman Ben Bernanke during the global financial crisis of 2008 as the right approach, contrasting this with that of Europe which he believes is in a deflationary trap. “Here you are caught in the unfortunate misconception about government debt. You need growth and then everything falls into place.” In other words, fiscal austerity is currently counter-productive and it would be better to reflate and grow out of the fiscal deficit rather than to trim government spending.


Update: Bottom found

Extract from the March 2016 quarterly report:

It is quite possible that unjustifiably deflationary global monetary policies have been a major force behind the fall in commodity and share prices, particularly since mid-2014. However a central banks-led reversal appears to have now happened with the MSCI All Countries Metals and Mining Index rising 43% in US$ from its low in late January to the end of the quarter.

Not surprisingly, the price recoveries of the shares of the more leveraged global mining companies e.g. Anglo-American PLC and Glencore PLC (+131% and +99% respectively) have been larger in response to the above-mentioned easier monetary policies. Those of companies with much stronger balance sheets e.g. BHP Billiton PLC and Rio Tinto PLC have naturally been less dramatic (+27% and +23% respectively), but these shares fell far less on the way down.

Update: Central Banks & Deflation

Extract from the December 2015 quarterly report:

The widely expected but largely irrelevant 0.25% increase in the US Federal Open Market Committee (FOMC) target interest rate in December remains a red herring to the proper assessment of US and global US$ liquidity conditions which in our opinion remain dire and accordingly very deflationary. While it could be argued that an FOMC target range of 0.25-0.5% is accommodative, the US private sector appears either unwilling or unable to borrow at these low rates to fund capital investment or consumption. As a result, both Federal Reserve credit and US money supply (M1) growth rates are approaching post- global financial crisis lows (chart 1). In terms of monetarist theory this offers a good explanation for the re-emergence of deflationary conditions in 2015 (chart 2):


Update: Emerging Markets

Extract from the September 2015 quarterly report:

The equities of emerging markets slumped by 17.8% in terms of the US dollar as concerns about China’s slowdown and the timing of a US interest rate hike reverberated across the commodities and currencies markets. Commodity prices plunged to multi-year lows on expectations of lower demand from China, whose economy appeared to be slowing faster than expected. This weighed heavily on the equities and currencies of major commodity exporters.

Chinese equities suffered significant losses. The high valuations and clampdown on margin leverage in the mainland A-share market triggered selling pressure across all Chinese share classes, including the Hong Kong-listed H shares. The surprise technical devaluation of the renminbi (RMB) on 11 August 2015 sparked fears that a perceived slowdown in China’s growth was worse than anticipated. In a single day, 24 August 2015 which has subsequently been dubbed “Black Monday”, the Shanghai Composite Index closed down 8.5%.


Update: Greece and the Eurozone

Extract from the June 2015 quarterly report:

Greece dominated the headlines for much of the quarter as each new deadline came and went without resolution. Its leaders failed to make a €1.55 billion loan repayment to the International Monetary Fund at the end of June and proposed a modified bailout package that would restructure the nation’s debt and extend repayment by two years. Greek leaders also called for a referendum, which took place shortly after the end of the quarter, in which a clear majority of voters decided against accepting the austerity measures demanded by its creditors. Despite this the Greek government ultimately agreed to a tough economic package with its creditors which has kept Greece in the Eurozone and will release much needed funds. The yields on short-term Greek debt soared, reflecting the high level of uncertainty.

Fortunately there is a lower risk of contagion now than was the case in 2011/2012 when the Eurozone had no growth and no monetary safety net. The European Central Bank (ECB) continued with its €60 billion per month quantitative easing (QE) programme and the European Court of Justice ruled that the ECB’s Outright Monetary Transactions (OMT) facility is within the scope of European treaties. This increases the ECB’s scope to provide additional extraordinary policy measures to calm markets if needed.

Consumer prices in the Eurozone rose modestly in the second quarter, alleviating concerns about deflation. ECB president, Mario Draghi, expressed confidence that “the weak and uneven recovery experienced in 2014 will turn into a more robust, sustainable upturn” and reconfirmed the ECB’s intention to continue its QE programme until September 2016 or until the Eurozone achieves its inflation target of 2%.