Is the global economy healthy or is the global economy sick? It is a question easily posed but not so easily answered. Soaring stock markets might on one hand be deemed to be reflecting a healthy outlook for growth and prosperity. On the other, they could just as easily be read as, in the context of too much cheap money sloshing around in the system, the equivalent of drug addicts celebrating the presence of better quality junk while forgetting that the higher purity puts them at a significantly greater risk of killing themselves on an “accidental overdose”.
China’s Q1 GDP figures might not be due out until tomorrow but there is already a horrid feeling afoot that they will not only fail to meet expectations – whereby “expectations” in a Chinese context are not exactly the same as they are here in the West – but that the closer they come to meeting them, the more likely they are to have been elegantly massaged. But why the sudden worries?
Day in, day out we are now being hit by reports of new all-time highs on this stock market and new recent highs on that one, while the people who count, the asset managers, are becoming progressively more aware that they are investing in a bubble. That said, they get paid to get the market right and not the fundamentals so they have learnt the hard way that being positioned incorrectly, even if for the right reasons, wins them no prizes.
Although the US still looks kind of okay there is no doubt that some of the fizz has gone out of growth and with China looking as though it has lost its mojo too, some fundamental questions are surfacing again as to whether the world is being a bit too optimistic as to where it thinks it is headed. Ahead of all, the IMF is raising questions.
A key issue, in my humble opinion, is the broad lack of appreciation that the great growth numbers of the first decade of the century were built on an ever-increasing assumption of debt. The great magic trick of the post 2007 era was to shift leverage from the private sector balance sheets to those of the public sector. Yes, of course banks are less leveraged than they were when they blew themselves up in 2008 but, if we’re honest, that leverage was given a new moniker, namely Quantitative Easing, and taken on by the central banks on behalf of us.
That leverage is now, at least in the case of the US, looking for a new home and finding it in the world of asset management. The UK is still hanging on to QE, the Chinese have their own version of money creation and Europe, as we know, is still building up. Whether money is created by commercial banks or central banks is irrelevant; the effect is to create growth where there isn’t any. Where central banks are, however, trying to reduce leverage, be that on their own or anybody else’s balance sheet, economic growth slows too.
Thus the quiz question is whether leverage can be reduced while growth is maintained. The answer is a simple but categorical “No!”. The final years of the past decade were dominated by the desire to “right-size” economies by way of austerity – maybe better defined as living within one’s means – but the political cost was evidently too high and re-gearing was the easy way out. Now, in the middle of the second decade of the century, the monetary authorities are again trying to find a new equilibrium. We might all be focused on the ECB and its belated build-up of QE and we might have survived the reversal of the Fed’s QE programme but the underlying issues as to how much we need to grow indebtedness in order to keep growth going remain open and unresolved.
Markets have gone through three or four years of optimism but are now faced with, or so it looks from here, a growing level of doubt. What is the correct measure for trend growth? The “new normal” is probably somewhere in the 1¼–1¾% space. That will not help to create the jobs to absorb a growing global workforce and increase individual wealth levels at the same time. We have either one or the other. Although the rich are growing richer, where does “rich begin”?
If you are out of work, anyone with a job looks rich.
The real wealth gap is the one between those in work and those out of work. The IMF gets this and Christine Lagarde gets it too but she has no longer has an electorate to appeal to. Those who do, especially those who are currently seeking power here in the UK, either don’t get it or if they do, they reckon that if they acted on the knowledge, they’d never get elected. Rising employment and rising pay-scales. I’d need some convincing.
Auto banks
A propos non-bank leverage. I note that GE is restructuring itself. It has long been treated as a finance company with a side-line in engineering. Most indices actually treat it as a financial and not an industrial name. Growing regulatory pressure has seemingly finally got the better of Thomas Edison’s successors and they have decided that the regulatory hassle of being in the finance business is making life too darned hard, leaving the board no time at all to concern itself with making things. Fine. But what about the car makers?
Without their finance arms, most of the auto manufacturers would struggle to make money at all, especially the volume makers. Although GE has been seen as a financial issuer, the car companies have so far avoided this ignominy. BMW Finance and VW Bank are no more automotive than GECC was an engineer. It will be interesting to see what these guys do in the wake of the GE restructuring.
