Bear with me, this is a bit of a think piece, it’s not likely to help you make money, merely some ramblings on what was a fairly confusing last couple days in global financial markets:
Earlier today Business Insider detailed a podcast held on March 9th by Goldman Sach’s Chief Global Equity Strategist Peter Oppenheimer (listen here) describing what he feels has been the source of global market volatility since last summer. Oppenheimer’s thesis is simple (his conclusions less so as one would expect), that the the global economy is in the throes of the Third Wave of a global credit crisis that started here in the U.S. a decade ago with collapse of our housing market. From the podcast:
First Wave: “The financial crisis in its 8th year, hasn’t been about one event, its really been about a series of related events, where the epic-center of the risks have shifted from one region to another. The beginning of the financial crisis in 2008/09 was the collapse int he U.S. housing market, and subprime, and broadened out into a credit crunch that effected the global economy in terms of a global recession and sharp decline in global risk asset prices. Ultimately this was stabilized by a series of very aggressive policies, interest rates got down to zero, the dollar devalued, and then we had QE, and that worked”
And you know the rest, the focus shifted to Europe not long after, because as Oppenheimer states:
Second Wave: “Europe had very levered banks, with exposure to U.S. subprime….and exposure to Sovereign debt in the periphery of Europe.
Then again the response, zero rates, bank bailouts and QE, and again, systemic risks stabilized. And then, wait for it:
Third Wave, “prompted by falling commodity prices and the focus shifted to emerging economies…broadened out to debt levels in EM, in China in particular. The obvious worry would be to combat this crisis in China, you would need zero rates, QE and currency devaluation, which would be deflationary and negative for global economy because interest rates were already so low in the U.S. and Europe.
So China’s economy is slowing as we know, and China has not played by the same crisis playbook as the U.S. and Europe, yet. The big difference as Oppenheimer describes is that China has maintained a fixed exchange rate as a result of their large current account surplus, and the concern is as their economy tries to find a bottom, the country may need to lower rates and devalue their currency, as they did last August, which caused global risk assets to go haywire. And the fear there is that loose monetary policy for such a large but slowing economy at this stage of the U.S. and European recovery could be very deflationary, as was largely the fear in the first 6 weeks of the year as oil and other commodities made new 13 year lows. Oppenheimer says that systemic risks have moderated a bit with the bounce in commodities, but over time, massive deleveraging will need to take place as it did here in the U.S. and as the Europeans are attempting to do in response to the first and second waves of the rolling crisis.
I guess where I am left scratching my head is that you would think the global economy can’t really get back to sustainable growth unless there is the sort of deleveraging that we saw out of corporations and consumers in the U.S. in the years after our crisis. Yet the ECB’s extension of negative rate policy, lowering of refinancing rate, increase by 20 billion Euros of bond buying a month and extending the purchases beyond sovereigns to corporates does little to de-lever and merely kicks the can down the road.
And China. The country just laid out their growth target for 2016, 6.5% to 7%, per Bloomberg, with 6.5% pegged as the baseline through 2020, less than last year’s 6.9%. (emphasis mine):
To reach the new target, the government will permit a record high deficit and has raised its money supply expansion target. The upshot: debt grows even as growth slows.
China’s Debt to GDP is exploding, at more than 250% and rising:
I know there are a lot of moving parts and my comments are probably overly simplistic. And I know it makes little sense to fight the ECB, the PBOC or any Central Bank for that matter. But if global equity markets can’t hold onto gains after the BOJ and FOMC meetings next week, then I think it is safe to say that the path of least resistance is truly no longer higher as has been the case in the age if ZIRP & QE, and the pendulum has shifted from years of buy the dip to sell the rip.
At this stage of the game, with zero or negative rates the world over and very weak global growth investors may finally be saying more debt is NOT the answer to a return to a healthy global economy, crisis stimulus needs to evolve, as many much sharper than I have argued for years.
The U.S is expected to have GDP growth of 2.6% this year and next, with little chance of new fiscal stimulus during both periods as we are in the midst of a presidential election cycle. The WSJ’s Paul Vigna hit this topic earlier today:
There’s a fear in the markets that central-bank bazookas don’t work anymore. “Risk assets about to top,” Bank of America noted as a talking point in a note this morning. “Central banks have played ‘rates card’ as aggressively as they can; ECB done, BoJ has nothing in the tank, and any U.S. macro strength will elicit Fed rate hike expectations.”
The markets may be coming to that conclusion, even if Friday’s action doesn’t make it appear so. There is the meme floating through the markets that monetary policies – what the central banks do – has reached its limits, and it’s time for fiscal policy and structural reform – what elected officials do – to be employed.
And what about the the U.S. consumer saving the world? U.S. Treasury Secretary Jacob Lew stated to the WSJ earlier in the week:
“The world can’t depend on the United States to be the consumer of first and last resort,” “That’s not a powerful enough engine to drive the whole global economy. So there needs to be more demand in other places where there’s the capacity to generate it.”
I guess if there is any take-away from the recent U.S. Jobs data is that while the unemployment level has been cut in half from its 2009 highs at 4.9% at levels not seen since early 2008, the participation rate is below pre-crisis levels from 2007 and wage growth has been anemic, having just had its first monthly drop in February in a year. I just don’t see how the U.S. consumer is going to power a global recovery as the ECB and the BOJ have had (aside from today) very tepid responses in their markets and their economies to recent easing.
From where I sit the global economy is nothing short of a mess despite “green shoots” here and “green shoots” there. Sentiment shifts reflected in risk asset prices have little to do with any substantive organic growth, and all to do with money printing and the desire of the powers that be to keep a listing ship afloat. Growth that has been amazingly hard to stimulate in the post financial crisis era, largely a result of global debt, its need to be serviced, or losses to be socialized. And it strikes me as odd that to fix a rolling debt crisis central banks have been forced to expand their balance sheets by more than $10 trillion since the first wave of the credit crisis, from Ed Yardeni Research Feb 12th: