It’s like wrestling with a greasy pig trying to get a grip on what’s happening in China and what shape it will be in by 2022 when Xi Jinping has to bow out, and you almost need to be a code cracker to gain insight into the thinking at the US Fed about rate rises, if indeed at the moment there’s any insight to be gained.
And the Fed and China create the weather in global markets.
Little wonder that Credit Suisse reports that most of its clients in the US and Europe feel ‘lost’ and many are cashing up because they simply don’t know what’s happening despite, no doubt, Credit Suisse’s best efforts to offer clear analyses and predictions.
Markets are listless: lack conviction and energy and indeed liquidity – the latter is causing some fund managers of my acquaintence to hyperventilate.
Take the issue of the Fed: It’s not difficult to understand why it’s dazed if not confused and is unable to provide markets with a steer, as its data dashboard about the US and global economies flashes red, yellow and green strobe lights.
The faith in central bankers to steer the global economy towards a robust and sustainable recovery is evaporating fast. It has been such a faith that has kept markets levitating or least not expelling too much air. It certainly hasn’t been the prospect of corporate revenue and profits’ growth, the lack of which have been masked to no small degree by the financial engineering of ‘buy-backs’ and M&A, which has fended off the bear.
It is widely accepted that seven years later zero interest rates and rounds of QE in the US, the EU and Japan have signally failed to kick ‘real’ economies back to life, but simply blown asset bubbles, as, for instance, young people wanting to buy, rent even, accommodation in London are finding to their cost.
The central bankers are left twisting in the wind as their governments funk supporting them with the appropriate fiscal measures to stimulate ‘real economy’ growth or even provide it more directly via <outside China> infrastructure spending. The toxic US Congress has seized up the American fiscal system, while the ECB’s Big Bazooka is mainly a means of fighting a currency war between the Euro, the Yen and the dollar. As for Japan: I called it in another piece elsewhere– a case of ‘Japandemonium.’
Turning to China, as Xi Jinping closes the cheque book and prepares to pack his bags having sampled some fish and chips or otherwise, I’m reminded of what one diplomat said to me recently—China’s so vast and so diverse that almost anything you say about it is going to be right.’’
Historically it’s been a theatre for feuding war lords, which has been largely internalised within the Party, with huge differences in culture, economy and prospects between one region and another—eg, the Eastern seaboard and the far West. The former has been the engine of China’s epic growth but is now running out of oxygen, as global export markets stall and China is undercut by, eg, Bangladesh, Vietnam, India, Malaysia, Myanmar, Indonesia.
The West has yet to be opened up, as still has much of Central China, and will take on extra importance and receive more largesse from Beijing as Xi’s new Silk Road project gathers momentum.
Xi’s visit to the UK makes clear China’s long-term strategy—ie, to spread its asset base far and wide <hence the nuclear deal>: diversify its investment portfolio: tie-in other powers to achieve its goal of setting up the Yuan/Renminbi as an alternative to the US dollar <hence London as the main putative offshore centre for Yuan trading; and help China become the main agenda setter in the global economy and with it countervailing power to the US.
Meanwhile– and let’s stop obsessing about China’s GDP growth stats, which are anyway ‘cooked’ and often ‘aspirational’– China’s $11 trillion, politically guided economy will inevitably show ‘lumpy’ growth over the next several years as it adjusts to a slow growth global economy and makes the transition to become by 2030 a mainly consumer/services driven economy.
Three main take-aways:
China really does have lots of money.
It still has mega-projects, apart from building the new ‘Silk Road’, to undertake as it ‘urbanises’ further and modernises much of Central and Western China with road, rail, water and energy infrastructure.
It will continue building up overseas assets, eg, to acquire foreign technology, and build out its global network of vital raw materials and food supplies.
And so the context for Investors over the next few months?
Here are some bold calls.
- The Fed won’t raise its rate until next March at the earliest.
- US economic growth will remain sub-par at 2% or less.
- China will avoid the dreaded ‘hard landing’ but will not be able or willing to help global economic recovery.
- The global economy is moving into a structural slowdown phase due to overcapacity, peak debt and insufficient aggregate demand.
- Commodity prices, including oil, won’t appreciate.
So it won’t be long before those Credit Suisse clients, and many more investors besides, shift from ‘confusion’ to ‘fear’ in illiquid markets.
And then…