We are seeing decent selling in today’s US equity markets, with the VIX up some 25%. And most people are pointing to the Trump scandals. But this is only one day. What is happening with Trump – while negative – will not change the arc of the US economy and markets.
This is a follow-up on my entry water post from yesterday. The thesis here is that mergers will be a big part of the landscape as companies seek economies of scale and scope or vertically integrate to deliver water to their customers. But before I go into the corporate landscape, let me continue developing some thoughts on why water matters now.
As the Trump economic team comes together, their economic vision is also coming together. In the last post, I laid out some overarching themes I am seeing from them on the hopes that reducing taxes and regulation will increase productive capital formation and long-term economic growth. You can put all of these ideas under the moniker of supply-side economics. I am also seeing a few individual ideas I wouldn’t put under that umbrella including the extension of the maturities of government bond issuance. Here are some thoughts on that issue.
The minutes from the Federal Reserve Board’s last meeting have come out and they are dovish. While on the one hand, we should praise the Fed for showing it is data-dependent as it has professed to be, on the other hand the abrupt change in is somewhat alarming. I would suggest the Fed is not necessarily panicked but it is certainly worried that it tightened into weakness in December and that future data will be much weaker than it previously anticipated. Some more thoughts follow below.
I hate backtracking, but I need to make a correction to the analysis I just sent out. An alert reader, who also tracks the jobs data I am using, wrote me, noting that my data series seemed to chop off the last several months of 2015, making it look like […]
I have still yet to get my hands on Willem Buiter’s recent research piece about his proposed China-led global recession. However, I have since seen snippets of the piece and have heard what he has to say about it. And frankly, he makes a lot of sense. Let me review the bits I have seen of what he is saying, using my own parlance and analysis. The title says it all about the economic environment and the economic model: disninflationary environment dominated by weak fiscal policy and a monetary offset globally. The outcome, I believe, like Buiter, is likely to be serious economic under-performance.
I have been meaning to write this post for a few days. And as the information comes in from Brazil, from China, from equity markets, it seems all the more compelling that this is indeed an important period in market and economic history. I would say the strong dollar is the genesis of a lot of this stuff and it is the unwind of multiple carry trades that is creating the market volatility. Some thoughts below
Many markets have now recovered from the initial wave of selling associated with the Chinese mini-devaluation catalyst. This should be expected. Some of these markets will surely continue higher. Nevertheless, the Chinese devaluation still represents an important marker in terms of global economic vulnerability. And so I want to map out a mental model on how a crisis is transmitted and why I believe this is a crisis.
My base case is that the US stock market correction will not extend to major losses without a U.S.-based economic slowdown. Therefore, as potent as the Chinese devaluation crisis is as a signal for increasing global deflationary pressures, the U.S. should weather this episode until its vulnerable areas like shale oil run into trouble. Earnings growth vulnerability is a downside risk. In the meantime, emerging markets will continue to be impacted negatively via trade flows and commodity prices.
After hard selling into Friday’s close in the U.S. and a global selloff in stocks today, it is clear that the Chinese mini-devaluation has begun a crisis, despite the Yuan appreciating for a seventh day. The mini-devaluation is merely a catalyst for a long overdue correction, But three questions remain. First, will the capital flows out of China force China to let the Yuan slip again? Second, will the downdraft in emerging market and commodity-heavy economies like Canada infect Europe and the United States? And, third will the US Federal Reserve resist rate hikes in the wake of the turmoil? My thoughts on those issues are below.
The macro environment right now is disinflationary as many countries struggle with product and labour ‘overcapacity’. The missing element is demand to meet supply. I want to talk about Fed monetary policy and the new Chinese currency regime in that context, using recent events as a vehicle to understand what kinds of risks are present.
For several months now, I have been hearing stories about the risk of capital flight and capital outflows out of China. At the same time, perhaps as a result of these outflows, traders have recently been trading CNY/USD at the upper end of the 2% band instituted by the People’s Bank of China, suggesting acute renminbi devaluation. Now that the PBoC has decided to institute a new currency regime that takes these market forces into account, a substantial depreciation in the Chinese currency is virtually guaranteed.