Faith in the Numbers
Almost exactly a decade ago, then-Treasury Secretary Henry Paulson gave an interview to Newsweek about the state of the global economy. Physically imposing but easy-mannered, the 6-foot, 5-inch ex-Goldman Sachs overlord radiated confidence in both mature and developing markets.
“We’ve had synchronized growth in Asia, the US and Europe,” Paulson said from his office overlooking Pennsylvania Avenue, all oak paneling and tufted-leather chairs. “EMs are growing three times as fast as in the developing world.”
Paulson was particularly positive about China, where an epochal transfer of power was simmering at a time when Beijing’s soft-yuan policy prompted demands in Congress for reprisal measures. He dismissed talk of a trade war however. “It is the height of arrogance for us to legislate laws that tell the Chinese what to do,” he said.
Just a few months later, Paulson was authorizing a $700 billion stability fund to save the global financial system from collapse – a near-calamity that China, alone among the G8 economies, survived in good enough order to help pull the global economy out of the wreckage.
Thus, did the second-largest financial melt-down evolve into the longest economic recovery. But how long will it last? For some time, we believe, though we will keep our eyes and ears open. Indeed, last month fairly surged with news and forecasts that preceded the 2008 crash: the nearing exhaustion of synchronized global growth, for example, along with frightfully high debt levels and friction over Sino-US trade. (Refreshingly however the current administration is not nearly so queasy about telling the Chinese what to do when it comes to protectionist trade practices, particularly with regard to copyright infringement.)
Of course, for a multi-asset investment shop like Anfield, best known for our fixed income work, with hazards come opportunities. It is also worth pointing out that, unlike their unsuspecting tumble into the abyss ten years ago, markets are responding to the end of this most prolonged expansionary cycle with ample warning.
Take earnings: With roughly half of S&P companies having reported their first quarter results, it appears that Wall Street is due for yet another record season. However, such heavyweights as Cantor Fitzgerald and Hedge Fund investor Kyle Bass warned that, facing a horizon line of wage-led inflation – the value of US payrolls rose by nearly 3.0% in the first quarter, the highest since 2008 – stocks may be facing peak margins and profitability. “With tax cuts and bank regulatory reform largely priced in,” according to Cantor, “investors have sold the good news.”
Speaking of peaks, not a few of the cognoscenti at Davos last month suggested that global growth may have seen its highest registers now that borrowing costs are heading north and Europe appears to be sputtering. Invesco Chief Global Market Strategist Kristina Hooper warned the specter of trade wars could imperil growth. We disagree, and we would draw her attention to the International Monetary Fund’s most recent analysis of the global economy, in which it raised its forecast for world growth this year and next by 0.2%.
The Fund sounded the alarm over the global debt burden – now at 225 percent of total GDP, larger than it was in 2008 and much of which is owed by the US – but it made clear that the quality of that debt is much more stable than it was on the eve of the crash, concentrated as it is in corporate and government debt bought on the cheap. This does feel like the debt super cycle of a decade ago.
April was also the month that the Eurozone gave out after more than a year of rising confidence and growth to go with it. Having sustained average growth of 3.5% by late last year, European Central Bank chief Mario Draghi acknowledged that “growth may have peaked” and effectively removed monetary policy normalization from the table. The average annual forecast for Euro-zone growth has been revised to 1.2%, with each of the major economies experiencing a sharp decline in growth. Meanwhile, the Citi Eurozone Economic Surprise Index is poised to test its post-2008 lows, according to ZeroHedge.
So what? If our post-tax cut projections are correct, US growth will offset any decline in European demand.
In short, we anticipate continued steady growth worldwide. Are we prepared to be wrong? Of course, absent an oracle. The most resilient of investors, be they irrepressible bulls or uncompromising bears, covet information from reputable sources for its own sake. In finance, as in most things in life, the most effective way to neutralize the unknown is to know it.
And in fact, there is another silver lining to be thankful for, which in turn favorably distinguishes the current late-cycle market from its 2008 counterpart: we see no pathologically leveraged instruments lurking in the portfolios of risk-centric traders that could, should they default, drag the real economy down with them.
At least none that we know of. And that is another reason to consume news and information habitually and thoughtfully.