Friday, 17 August 2018

On China and a damp squib

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Anthony Peters takes a dry look at the global economy.

It was a very, very wet Bank Holiday Monday here in the UK which meant that we have had four out of four of them this year. In fact, while Europe has been melting this summer, we here have been gently rusting but the summer is now formally over – meteorologically, autumn begins today – and it’s heads down and elbows out.

I did, out of desperation, switch my screens on yesterday to have a peek but there wasn’t enough going on to hold my interest. What did strike me, though, was the impact of Jackson Hole, or, if you prefer, the lack thereof. I have long held the belief that the central banks have lost much of their moral authority on the back of their failure to prevent the credit bubble which was in the first place very much of their making, followed its cataclysmic bursting with their grand attempt to cover up their failings by drowning them in more cheap money created under the rather strange and of itself meaningless sobriquet of quantitative easing.

This morning I come back to panicky newsrooms with ashen-faced presenters howling about the grand affirmation that the Chinese economy is in mortal trouble. Why so? All because its Manufacturing PMI for August read 49.7. Sure, PMIs are diffusion indices and sub-50 indicates contraction, but since September last year the reading has never been more than 1% either side of 50 and both January and February of this year were below the magic number. Now hold that up against the USA where the PMI hit 33.1 in December 2008 – that’s what scary is about. In comparison, China’s 49.7 is within no more than a rounding error of being positive.

Please don’t get me wrong; China is not a great story. I’m not sure how many people, if asked whether it’s a free market or a command economy would confidently put it in the former camp. On that basis, applying free-market thinking and interpretation to a command economy environment is a bit like sticking the engine of a FIAT 500 into the body of a Ferrari 458 – isn’t a 500 bigger than a 458?– and then being surprised by the odd outcome.


Even if China is slowing a bit, which no doubt it is, the US is, equally without doubt, growing and the American economy is still larger than that of China. Europe, too, is showing signs of having bottomed out. Fact is that the Chinese “type” of growth has had significantly greater impact on base commodities than a renewed pick-up in Western activity ever will so that staring obsessively and exclusively at a stuttering China and at slipping global commodity prices will inevitably lead to some false conclusions with respect to aggregate global growth prospects.

Not all is rosy either. For those who really do care and who are prepared to take a short hour out of their precious day, I’d like to warmly recommend the podcast of an outstanding Newshour Extra which was broadcast by the BBC World Service last week called “Crash, Contagion or Correction”. It raises many of the questions which most bread-and-butter economists of both the buy-side and the sell-side dare not ask, and which, when alluded to by teenage scribbler columnists such as myself, are regarded by those who do read output as no more than amusing distractions from the daily process of following the herd. After all, we get paid to get the short-term market right and not the economy. The market goes where most of its players go, right or wrong.

This week

It’s a short week, not only for us who are just back, but in the US too, as it ends with the Labor Day Weekend. Thus Friday, despite the release of the Labor Department stats including the Non-farm Payroll, will be a half-day and thus US markets this week will still not be running at full pelt. Even before then, the raft of releases due is impressive even though we are getting more and more secondary and even tertiary numbers thrown at us which create nothing other than more white noise in an already difficult world. It might be time to begin casting bones again and observing flocks of birds; tea leaves might be of use too.

In Europe, meanwhile, instead of worrying about growth and employment, the grand brotherhood is tearing itself apart over immigration policy. There have been some harsh words exchanged between Hungary and France in the past few days and Germany, thinking that it was leading from the front, has discovered that it has courageously charged forward into the breach but with nobody following. Eurosceptics should be having a field-day but have found that they need to be cautious so as not to be more easily branded as simple racists and xenophobes.

If you listen to the podcast I recommended, you will hear of a movement amongst economics students at my alma mater , the University of Manchester, to seek a new kind of economic theory. They have discovered – a long held and vociferously argued belief of mine – that the economic theory of the 50s and 60s which still dominates academic thinking, and which hence influenced our own training, has run out of road in the 21st century and that the time has come for a fundamentally new approach. My view remains that GDP, as a measure of all things, needs to be binned and replaced with a value-added and not a solely quantity-based metric.

On a practical front, I do not belong to the school of thought which sees stocks 20% or 30% lower at the end of the year. I can’t see them going anywhere in a hurry but I am not as gloomy about asset prices as are some around me. I also expect credit spreads to remain stable and unspectacular.

Markets will surely be volatile but I believe they will revert to the mean for the simple reason that there is nowhere else to go with money and holding cash remains too expensive. A quarter or half-point increase in short US rates between now and year-end surely isn’t going to make the difference – unless we’re leaden-footed enough to let it do so. What might make the difference is the FOMC ceasing to play hide-and-seek with the markets.

Twelve weeks to Thanksgiving – let’s make them count.

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