Worries ‘Bout Debt

In DC this weekend they met
The World Bank and IMF set
They bitched about Trump
Explained there’s no slump
But did express worries ‘bout debt

Markets are on the quiet side this morning as they consolidate the gains seen on Friday. Risk continues to be in vogue and so haven currencies; dollars, Swiss francs and Japanese yen, remain under modest pressure. That said, the FX market remains broadly range bound, at least within the G10 space.

The annual World Bank / IMF meetings were held this past weekend in Washington D.C. and all the global economic glitterati were present. Arguably there were three key themes; central bank independence is paramount to successful policy and there is great concern over President Trump’s ongoing, and increasingly strident, complaints about the Fed. Secondly there continues to be broad concern over the slowing growth trajectory that was highlighted by the IMF reducing their global growth forecast yet again last week, this time down to 3.3% in 2019 from their 3.7% estimate last October. Finally, there was evidence that the massive growth in debt around the world is starting to make a few policymakers more nervous.

Of course, the question is will policymakers actually change anything that they do given their concerns? As to the first, the only hope they have is to raise the issue frequently enough so that it gains a broad consensus amongst the non-economic set. Frankly, if you asked the proverbial man on the street who was Fed Chair, or the names of any of the other governors, I would wager less than one in ten people would know any of the answers. At the same time, with the President’s constant haranguing, the Fed remains an excellent scapegoat for any weakness in the US economy going forward. As much as it galls the establishment, there is no reason to believe that this behavior is going to change throughout the rest of the Trump presidency and probably well beyond that.

Regarding the second issue, slowing growth, once again given the current stance of virtually the entire global economic central bank community, it is unclear they have any ability to do anything else. After all, the whole group is already set at ultra-easy money, with limited ability to move any further. But perhaps more importantly, it is questionable whether the central banks are the actual drivers of economic growth, as much as they would like to think they are. Arguably, economic growth comes from a combination of consumer demand and production of those goods and services demanded. The last time I checked, the Fed neither consumed very much nor produced anything (other than hot air and paperwork). All I’m saying is that the ongoing belief that central banks control the economy might be faulty. What they do control is money and financial assets, but as we have seen during the past decade, a strong rally in financial assets does not necessarily translate into strong growth.

Finally, regarding the massive increase in debt that we have seen during the past decade, they are absolutely right to be concerned about this process. As Rogoff and Reinhart explained in their classic book, This Time is Different, excessive debt is the one thing that has consistently been shown to have a negative effect on economic growth. And while the definition of excessive may be uncertain, it is abundantly clear that debt/GDP ratios >100% is excessive.

Add it all up and it seems unlikely that there is going to be a surge in economic growth in the near future, or even the medium term. Thus, when comparing the situations across the globe, the current status is likely to remain the future status.

Turning to the upcoming week, we have a fair amount of data as well as another group of Fed speakers.

Today Empire Manufacturing 6.7
Tuesday IP 0.2%
  Capacity Utilization 79.1%
Wednesday Trade Balance -$53.5B
  Fed Beige Book  
Thursday Initial Claims 205K
  Philly Fed 10.4
  Retail Sales 0.9%
  -ex autos 0.7%
  Business Inventories 0.4%
Friday Housing Starts 1.23M
  Building Permits 1.30M

In addition to this, we hear from five more Fed speakers, although none of them are the big guns like Powell or Williams. And as I have repeatedly described, the Fed story is already well known and unlikely to change unless the data really starts to adjust. Add to this the fact that now Brexit is a back-burner issue and there remains scant information on the US-China trade talks and quite frankly, this week in FX is going to be all about US equity market earnings data. If the data is good and risk is embraced, the dollar will suffer and vice versa.

Good luck
Adf

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s