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Summertime Blues or Take the Red Pill? (Macro Macchiato 15/07/19)

Wall Street enters its thundery summer earnings season this week in a stormy emotional state. More S&P 500 companies have issued negative guidance for the second quarter than have issued positive guidance. In fact, the negative:positive ratio is 3.8 to 1 as reported by Refinitiv (as Thomson Reuters is now called). That’s double the average for the previous four quarters of 1.9 to 1.

All the major US stock indices hit records last week in anticipation of a cut in the US fed funds rate. That macro call only supposes that corporates’ borrowing costs will fall, not that their investment levels, productivity or profitability is rising. There is a growing anxiety that recent US economic growth cannot be sustained. But when jobs are increasing in number, joblessness is falling and wages are rising, the government can claim that its lower-tax policies are working.

The S&P 500 may be a victim of its own success. The US dollar has been rising in value since 2011 as the US economy has outperformed its competitors. That has led to capital inflows from investors. The increase in demand for the dollar and its rising value have made it harder for US corporates to export profitably. The government continues to lean on the Federal Reserve to lower rates and hints noisily at currency interventions to resist further rises in the value of the dollar. Commentators repudiate the fantasy economics; investors stand ready to benefit.

This morning the Chinese National Bureau of Statistics issued data showing that GDP grew 6.2% year on year in 2Q19, lower than the 6.4% in 1Q and 6.6% recorded for calendar 2018. This is the lowest rate since modern records began in 1992. Exports and residential construction were particularly weak while consumer spending held up. China appears not to be imploding under the weight of its trade spat with the US. Nor do its difficulties in Hong Kong appear to be affecting its mainland economy.

The Chinese government can claim that the latest GDP figures are in line with policy and that they demonstrate a “steady-as-she-goes” approach is working. A Bureau of Statistics representative told media that tax cuts earlier this year had supported domestic consumption, on which China is increasingly dependent, as per the grand economic plan. There is bound to be some political influence on the data, but rising factory output (6.3% annually in June) and consumer spending (up 9.8% year on year in June) look healthy. So investors need not fear a hard landing or political upheaval any time soon.

In the eurozone, economic data take a back seat this week to politics as Germany’s nominee to run the EU, Ursula von der Leyen, will give a speech in Brussels on Tuesday outlining her program of policies should she be elected president of the European Commission. Her appointment needs to be rubber stamped by the European Parliament (Europe: much more democratic than China). The expectation is that the Parliament will fear a season of uncertainty and horse-trading if it does not approve Ms von der Leyen and will therefore maintain its tradition of acquiescence.

If Ms von der Leyen is joined in the EU panopticon by Christine Lagarde as new head of the European Central Bank, Europe will have its Franco-German balance restored and we can expect more of the same in terms of policy: more political union, more fiscal rectitude leavened with monetary legerdemain, more emphasis on national targets for debt and budgets, more finger-in-the-ears ignoring the gilets jaunes and populists, and a harder line on perfidious Albion. That should at least comfort eurozone manufacturers, exporters and investors.

The Take Away

​​The global economy has been growing for a full 10 years now and is overdue a cyclical recession. It looks increasingly certain that further blue-pilling in the form of looser fiscal or monetary policy will be required very soon to keep the major economies of the world growing. If you think that we are being led by a complacent elite in a fantasy world in which everlasting growth and infinite consumption can be guaranteed by ever less democratic institutions pulling the fiscal and monetary levers to force feed us ever more consumer goods, what is the alternative? Twenty years on from the release of The Matrix, we seem ever more content to keep taking the blue pill. The red pill brigade – populists, brexiteers, Trump – seem to be the loonies. It was the same in the film. But of course, that was only fiction.

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