Chief Investment Officer
Summary: It’s getting increasingly difficult to keep score on all of the risks converging on global markets and the growth outlook. Just back from holidays, this is my attempt to evaluate these risks in order of significance…
You can't know too much, but you can say too much. - Calvin Coolidge
What is clear for this old macro guy is that all the warning signs are flashing DEEP RED.
Expected policy response:
China CNY Fixing/Devaluation
The magic “line in the sand” of 7.00 CNY per USD was broken last week and since then China has allowed its currency to slide by 2% in CNY terms. This is probably the single most important change to world foreign exchange policies since…Bretton Woods? It extends the trade war to foreign exchange and away from multi decades of controlled and G-7 coordinated deal/interventions to offset trade deficits and structural issues.
Make no mistake: This is one of the single biggest paradigm shifts we have had since the global financial crisis of 2008-09. The major global economic powers are further away from multilateral agreement on nearly everything than at any point during the last decade. Their central banks agree on lower rates (which will not work). Now comes an outright competition to devalue their currencies. Trade war + FX war = Recession & political noise. The blame is not on the US or China only, it’s everywhere – take the ECB, for example, where perma-dove Draghi has always had both eyes on the Euro, and look at Asian FX since last Monday’s escalation (the Trump announcement of further tariffs from September 1):
Asia FX index – almost taking out low…. China devalues, so does Asia...
German recession – this week (Wednesday August 13th – Consensus: -0.3% YoY) will confirm what assets in Germany is already pricing: a deep recession. This happens despite plenty of room for fiscal stimulus as Germany’s budget surplus runs at +1.5% of GDP. Germany in recession will accelerate negative trends in France, Italy and rest of Europe. Both Italy and France are in violation of the 3.0% Maastricht criteria as I write this – imagine where it ends with present political turmoil in Europe by December 2019.
German IFO – it doesn’t get much worse than this…
DAX Index testing 200 simple moving average
Brexit or rather the lack of it now risks sending UK into a deep recession. The constant delay is now met by sizeable credit contraction impulse which to us confirms our overweight negative GBP view.
All of the actions by central banks will only make things worse – driving yields lower and more and more debt yielding negative return.
The combination of the current multilateral frameworks and trade relationships under attack and central bank action in the pipeline dictates: …more of the same before we get the final break-out from their utterly futile exercise of buying time.
The “productive Homo Sapiens” is all but destroyed and replaced by policies that only reinforce zombie behavior. But once the central banks have fired their remaining futile bullets not far beyond the balance of this year, macro and political developments will gallop into gear and shape the politics for decades to come.
The market is trying to get back to the pre-Covid and pre-war times, but that model is broken. A new dawn is here and the financial world needs to adapt.
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