Tag Archives: Global Trade

My Top 5 Biggest New Year Risks to the Global Economy

In order or scale, priority and impact, here are my picks for the five most critical trigger-points that may impact, negatively, a return to ‘old normal’. Currently we stand at the edifice of a new normal, the great stagflation, but the anti-establishment and populist changes taking place seem to suggest a knew-jerk reaction by nations fed up with socialist dressed-up-as-market politics that have led the West for 20 years.

  1. China’s economy stagnates or crashes. Debt levels are above EM levels and are now among the largest, approaching the incredulous Japanese levels. This dynamic is not sustainable for a nation whose currency is not a reserve currency. However the economy is the world second largest even without the development and emergence of whole swathes of other sectors such as healthcare and leisure, which may offset contracting first world growth over the next year or two. So the risk is there and there is no clear leaning one way or the other, yet. But debt is growing faster than these new sectors; exchange reserves at $3bn are limited (though huge), and currency value management is not market-bases. So greater risk is with the downside. China’s growth flags, currency sinks, counterbalancing US growth and confidence, creating a massive imbalance in the global economy. Europe watches on as global GDP sinks under its own debt weight. KPI’s to avoid/watch out for: China GDP falls to or below 4.5%; China’s debt load surpasses 300% of GDP.
  2. Trump quits after 18 months due to intractable political limitations that prevent policy changes he seeks related to healthcare, regulatory complexity, tax reform and trade. Trump’s political rhetoric is being replaced with solid business-based policy. However not all such policies have ever been tested at a national level and scale. Some efforts will fall foul to physical, social and political limitations. This may prove frustrating for Trump. As growth will return short term, such medium term frustration will lead Trump to claim, “My policies worked, see? But now the system has reached its limit and there is nothing I can do until the country agrees with me to shut down the whole government system! Since they are not ready, yet, I am ‘outa here’ until they are!” Markets crash, interest rates balloon, inflation rages all within a year. World economy sinks into the abyss. KPI’s to avoid/watch out for: US GDP 1H 2017 reaches 4.5% but Congressional conflict leads to policy deadlock ; vacancy in position at Whitehouse. 
  3. Emerging Marker currency crisis as massed capital investment is siphoned away towards a resurgent US economy and dominant dollar, as well as a stable and even growing China economy. This situation is already underway. The risk is that what is currently a reasonably ordered trend becomes a financial route. This is possible since the financial markets are starved of yield due to the collective policies of central banks to keep interest rates very low for too long and for the build up in their massive balance sheets. If the trend becomes a torrent, EM’s will have to yank up interest rates far beyond what their local economics can support and economic disaster will follow. This will ferment more political instability and drive increased destabilizing ebonies to ruin. Though the US may be growing well, compared to its peers, it’s the imbalance they tips the ship over. KPI’s to avoid/watch out for: dollar index, the weighted value against basket of currencies, surpasses 115. It is currently at 103.33, which is a 14 year high; EM interest rate differential balloons.
  4. Hard Brexit forced through by intransigent Europeans who think the EU experiment is more about political union than economic liberalism. A new trade deal, legal framework and social contract can be negotiated within a two year window. But only if politicians and civil servants want it too. Continental politicians however, under the strain from populist pressures, will equate intransigence over Brexit negotiations with an improved politicos standing with their electorates. Fool for them as this will actually create the opposite response for such behavior will simply worsen the economic climate. The lack of any sign of return to old normal will lead to political paralysis and the clock will time-out. Hard Brexit will be forced upon a supplicant Britian. Europe and UK economies will tank; currency wars will wage; global trade will collapse further. This will not sunk the global economy short term but will act as a dead weight slowing its resurgence down. KPI’s to avoid/watch out for: no agreement at end of two year period lost triggering of Article 50. 
  5. Latin or Indian debt or economic crisis. Much like with other EM’s, growing sectors of significant size around the world may blow up- India being the best example. India’s growth is different to China. It is more integrated socially and politically with the west, but it’s corruption levels are far greater than what one can see or observe in China. It is possible that local economic difficulties, hard to observe today, may trigger a collapse in confidence that leads to a destabilizing debt or currency crisis. Brazil’s economy is certainly in the dock currently; Argentina is struggling. India’s economy looks like paradise right now but the growth across the country is extremely uneven- you only have to look at public sector infrastructure investment. So should two such countries suffer local difficulties, the combination may result in significant risk to the global financial system. KPI’s to avoid/watch out for: two simultaneous financial/debt crisis afflicting EM or India.

These are my top 5 risks the global economy faces in 2017. I hope I am wide of the mark, in a positive way. I left Japan off the top 5 list yet their economy remains anathema to growth. The Japanese market invented the whole new normal cycle with a anaemic growth, massive debt, low inflation, and demographic contraction. And Japan has an amazing debt load that refuses to spook investors. Things may yet have a Japanese tinge before the year end. Does Japan, along with the US, lead the global economy back to the old normal!
What potential risks do you see?


The Two Faces of Europe on Trade

The left hand of Brussels is complaining that should the US focus on ‘America First’ it would harm global trade and therefore be bad for everyone. See ECB wants on risk posed by ‘American first’ policy.  The right hand of Brussels is contemplating stiffing China with tariffs on steel imports due to that country’s subsidized over-capacity. See The EU unwisely sides towards protectionism.

Yet the articles covering both stories appear in different parts of every newspaper. The EU is blatantly two-faced. Better yet the US won’t be insular; Trump has more business skill than all the politicians of the EU. He is using the hint of tariffs as a negotiation tactic. Trump will likely do more for global trade than any political group, period. It will take time for the world to catch up, I am sure.  I suspect the US and UK will fast-track a western union trade deal within the next 12 months.

Hopefully the EU will follow Britain and the US with some more rational, economicall liberal, free-trade leaders in the upcoming elections.  Left leaning, socially progressive types are too focused on short term personal gain and not focused on the bigger issues.

China Shock: The Untold Story

Front one of the US print edition of the Wall Street Journal last Fridy: Deep, Swift China Shock Drove Trump’s Support. A fascinating article that suggest, despite its title, that the impacts of China as it joined the global trade game led to swift and irreparable damage to America’s workforce and so led to the swell of support for Trump and Saunders. It so happens that I am half way through reading China Shock, by  David Autor, David Dorn, and Gordon Hanson. The story in the paper and the WSJ article is referring to in its title.

There are are several things to note about this so called, “China Shock”. They are not all good news and hindsight helps (where doesn’t it?)

Firstly global trade is taking a bashing. This is unfortunate. It is unfortunate because economically global trade has been shown to balance out and help everyone, even if one nation is better than all others at everything. What the economists models thus far did not show, nor were they meant to, is what happens under extreme changes in the dynamics of global trade. That is the fact: China shock is not a weakness of global trade, it’s a lack of understanding of the dynamics underpinning it.

The WSJ journal and the paper demonstrate with examples where massive displacement of jobs took place, in a very quick period, over and over in related industries. The two factors that made the shock such a shock are:

  • Original employers (US, per WSJ article and including Europe per the paper) national institutions, job training, educational practices and industrial policy were focused on the wrong thing. Instead of being focused on rapid migration and support for global trade dynamics, they were more focused on slow and limited protection for targeted and said to be critical industries
  • Exporting nation (China) was exporting so much cheap Labour and products across a broad and often related swathe of markets and industries that had a multiplier effect I terms of displacement and elimination of ‘landing places’ for those initially displaced.

These two factors explain how it was that worker after worker listed in the article lost a job, gained a job, then lost it again. Then finally were not able to get a job.

Our economists did misunderstand some of the dynamics of global trade given the entrance of such a large supplier as China. But governments should have spent more time focused on policies related to growth and industrial migration, rather than pandering to selfish efforts protecting themselves.  

Now that China Shock has shocked, what do we do about it? Well, media and press are now gunning for global trade. This hype will damage global growth and crimp efforts to get past current anemic conditions. Capitalism is again under attack not due to a failure of the system but a failure of our own misunderstanding of the dynamics of the world around us.

Governments need to focus on building a resilient trade and industrial policy that responds to changing global dynamics. Industry and government need to work more closely together so that as global trade pressures alter the competing advantage of nations and firms, action can be taken to provide alternative safety nets.

Another article in the Business and Technology section of the WSJ demonstrates this: Coding Camps Attract Tech Firms. A small private educator runs 12 week courses for $15,000 that leads to no degree. But almost every attendee gets a job within 6 weeks of graduating with an average salary of over $74K. What is impressive is that the curriculum changes within weeks of any new demands from industry. Try doing this at more established educational establishments.

Governments also need to work on exchange rate policy and collaborative monetary policy. One aspect, not explored in detail here, relates to how currency value can have a big impact on comparative advantage. As such this policy effort needs to be reconciled to industrial policy.

If global trade gets bashed, and government policy targets protection of industries that are no longer competitive, we will just avoid paying the piper at the right time. The piper will be back but his tune will be louder and more deafening.

The Fed’s Bark is Loud; the PBOC’s Bite will be much Worse

Andrew Browne’s article, from yesterday’s US print edition of the Wall Street Journal, (see Yuan’s Fall is Just Noise) nicely captures the current situation and market sentiment as it pertains to the confidence in the renminbi. Only the day before China warned off George Soros from attacking its currency. This sounds like red rag to a bull, if you ask me. But the real point is valid: if the market perceives an imbalance or a weakness in a currency it will take a position. In this I am betting that Soros would hedge for a fall in the Chinese currency. And the PBOC would be required to use interest rates and its diminishing currency reserves to defend and control the fall. It has already used close to $800m of what was a $4tn war chest.

Since the PBOC is not keen to use its powder – and since it had little experience in how to survive such a new phenomena as a free market driving its currency value – it will likely turn to capital controls to help stem the flow of currency leaving its shores.  As the Fed raises rates, more and more money is changing direction from emerging markets, including China, back to the US.  So even though the press and pundits in the west are looking at the bark that is the Fed with its meetings and minutes, and discussions about the odd quarter point rise in rates, the reality is that what China does, it’s bite, will be far more impactful on the global economy.  

I noted the other day that China will likely look to introduce capital controls since history books will have shown its economic guru’s that this helps control the flood. Well when you read your newspapers this morning you will note that it the process has begun, rather quietly too.  In the Financial Times you can see Capital Controls no longer taboo in fight against flight, and in the Wall Street Journal, Beijing Moves to Slow Money Outflow.  The next phase of the economic cycle is about to get started and it won’t be pretty.

Capital Controls- Here We Come

As expected (see Release the Kraken: Free capital flows will transmit Chinese economic woes fast), and reported in today’s US print edition of the Wall Street Journal, some emerging markets are invoking capital controls to help prevent their currency leaving. The article, Curbs on Outflows Increase, explains that several countries were slapping taxes on certain transactions that resulted in currency movements.  
Certainly these are not large or developed economies but it is a sign of a growing problem. And larger economies may in time respond in kind with their own actions should they anticipate unfair restrictions. It is just a matter of time. Global trade, already down, will take another hit. The very work that would help create growth, is being strangled. That’s just great.

Britain’s “China First” Strategy Makes Sense – What’s all the Fuss?

There were more rumblings, reported in today’s US print edition of the Financial Times (See ‘UK allies baffled by red carpet treatment for Xi‘). It seems that UK allies, including the US, are raising eyebrows at the thought that Britain is rolling out the red carpet to the Chinese Premier, and generally budding-up to the Chinese too much. Frankly I don’t see what the fuss is all about. The move seems a little excessive but perfectly within the bounds of what such a trading nation should/could do. 

Think of the following:

  • China will soon be the largest economy in the world. It has become the largest single-factor in driving global economic growth 
  • The UK-Chinese trading relationship has only one way to go – up (since there is so little taking place today). The only bright spot is that China is the UK’s sixth largest export market, well behind US, France and Germany
  • The global monetary system will likely continue to slowly pivot to Asia and China specifically in the next 5-10 years
  • The rest of the West seems incapable of any strong change in economy policy that would be needed to push the US to drive the global growth (thus the Western allies look soft and meandering)
  • The UK is a trading and market-based economy – it requires connections and collaborations with other likeminded nations

Of course, the UK is not doing any of this for the good of mankind, other than the fact that it should be good for both parties. They know how far then can trust the Chinese – but that’s not the point. It’s good politics and it’s good economics. Does it benefit the Chinese more in the short term in terms of exposure to the West? So what. Someone will do this at some point, why not the UK now? 

Cameron and Osborne have said that there is risk here, and they are right. The Chinese economy could blow up (very small probability); the US could suddenly put a Republican in the White House and the right-wing might settle their differences and change course and become responsible (again, very small probability). Britain is taking a smart, calculated risk. History should, I would argue, vindicate their actions in time. I say “go for it” to them and I wish them well in their efforts.  


Similarities to 1920’s continue: global trade tumbling; protection up

The economic news is getting more frigthening for someone who has studied the period between the World Wars, specifically 1920-22.  We already had similarities across political schism, unsustainable public debt levels, exchange rate volatility, currency depreciation as a defensive move to try to grow exports (that failes/failed), and now we have data to show that world trade is falling again.

The article in the US print edition of the Wall Street Journal titled, Worries Rise Over Global Trade Slide, shows that global trade, already sluggish, is slowing even more.  After the financial crisis global trade recovered sharply but has then averaged 3% a year, compared to 6% a year from 1983 to 2008.  The data is from the World Trade Organization (WTO).  

Growing global trade helps drive productivity increases as it provides a means for specialization and more efficient use of resources.  Of course for some, this appears short term as local displacement of employment.  But overall data shows that global trade, rather than local trade, is what drives greater economic growth.  

There are several reasons given, in the article, as to why global trade has not recovered.  These include economic maliase at local levels (e.g. US, Europe), the recent Chinese slow down, but also the failure to negotiate new and updated trade deals.  It is as if each soverign nation continues to behave as if they can survive and grow independent of each other.  Such behavior is reinforcing the stagnation and adding to the sense of nervousness that now drives the stock market.  We have lost our mojo.

To hammer home the point, just look at another front page article today: Price Tag of Sanders Proposals: $18 Trillion.  Really?  The left-of-center candidate for the Democratic nomination has just released data on his spending plans, should he become president.  It is as if we can buy our way to office (we can) and spend our way out of a hole (we can’t).  And the masses might even fall for this line.  The fact that such spending ideas can be sold demonstrates how far we have come, and how much of our mojo we have losst.  And now the emperor has new clothes.