Update: Change Of Tack

Extract from the December 2018 quarterly report:

A feature of the past quarter was the sudden capitulation of global economic growth expectations and sharp downward corrections in economically sensitive asset prices such as shares and oil. The dominant force at play appears to have been US monetary policy which became excessively tight relative to prospective growth and inflation but ongoing tariff wars no doubt played a role too. Tighter US monetary policy (chart 1) was a consequence of the Fed’s oft-stated intention to normalise the term structure of US interest rates (known as the “yield curve”). Aggressive quantitative easing (QE) following the global financial crisis of 2008 created downward distortions in interest rates, especially short-term rates (chart 2):


Update: Tighten Up

Extract from the September 2018 quarterly report:

Equity prices have recently experienced sharp corrections amidst concerns that the US Fed may pick up the pace of its interest rate hikes. Quoting Donald Trump: “I really disagree with what the Fed is doing. I think the Fed is making a mistake. They’re so tight. I think the Fed has gone crazy.” So is he right? “Crazy” might be too strong a word but there is no doubt that since Q1 2018 the Fed has been tightening monetary policy by selling securities such as Treasury Bills (TB’s) which takes liquidity out of the financial system (chart 1). One could even make a case that monetary policy has been tightening since quantitative easing (QE) ended in 2014. As the Chinese proverb says, “When there is no gain the loss is obvious!”. In any event by their own admission the Fed is no longer accommodative.


Update: Fed Model

Extract from the June 2018 quarterly report:

As stated in our previous report, we believe that Trump is using tariffs as a negotiating tactic to level an undoubtedly tilted playing field and that contrary to popular perception average global tariffs ultimately may end up lower. Support for this view is the world’s largest free trade agreement recently concluded between the EU and Japan which, although the US was not a party to it, is a step in the right direction.


Update: Trade Wars

Extract from the March 2018 quarterly report:

While Donald Trump’s tariff hikes have triggered trade war fears, it is difficult at this stage to know how far a retaliatory cycle of tariff increases would go. This is because he appears to be using tariff increases or threats thereof as a negotiating tactic to reverse unfair trade practices in the USA’s trading partners. We suspect it is just a negotiating tactic because it is almost certain that Trump and his team of economic advisors are aware of the Smoot-Hawley Tariff Act of 1930 which raised tariffs on over 20 000 US imported goods. The consensus of economists is that the Act exacerbated the great depression of 1929-1933 although the legendary monetarist Milton Friedman believes that tight monetary policy played a greater role. Either way, it appears as if Trump’s negotiating tactics may be working. (more…)

Update: Ships Ahoy!

Extract from the December 2017 quarterly report:

With global growth set to reach 4% in 2018, the improved outlook to which we referred last quarter has become more entrenched and we like Investec’s quote: “All rooms sea-facing in 2018”. This implies demand for later cycle assets, commodities and emerging markets. Country specific policies such as US tax reform and infrastructural spending should enhance this supportive environment. The one potential major headwind remains higher interest rates through normalisation of monetary policies post the era of massive quantitative easing (QE). However all evidence is that with inflation showing no signs of life, US interest rates will rise slowly and reactively to good US data and therefore at this stage pose no threat to continued economic growth. The fundamentals for equity investments accordingly remain very positive. However valuations have become more expensive, e.g. US dividend yields have fallen, but are not yet in bubble territory such as 1999-2000 (see chart 1). On the balance of probabilities, the bull market remains intact.


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.