In our first podcast, UBS and Goldman Sachs Asset Management give their bullish take on the world. Both expect higher equities and yields over the next year. The former Bank of England governor Mervyn King is less optimistic. In an IMF podcast, he makes the case for secular stagnation and ongoing growth drags from trade uncertainty.
JP Morgan’s Jim Glassman looks at the Fed’s recent Financial Stability Report. The main risks of asset valuations, leverage, financial sector stability, and funding issues appear to be present but not at worrying levels. Yet.
We round out our podcasts with a double dose of geopolitics. Eurasia’s Ian Bremmer argues that populism, especially in Emerging Markets, is here to stay. Meanwhile, the Brookings Institute makes the case that the Saudi Aramco IPO was as much to do with politics as economics.
Finally, is the news depressing you? Then listen to my latest podcast: Don’t Watch the News, Share Your Own.
How Should I Be Positioned? (UBS on Air, 29 min listen) Jason Draho, Head of Asset Allocation at UBS, and John Tousley, Head of Global Markets Strategy at Goldman Sachs Asset Management, discuss their outlooks for 2020:
• Both believe global PMIs and labour market data have bottomed. They expect a global expansion with US growth at 2% and global growth at 3.5%.
• Both are optimistic on US and China phasing out tariffs. However, there is risk of the agreement being pushed into 2020 or possibly of a reversal in their stance – this happened in April this year.
• Both see higher rates in one to two years, which the markets have not currently priced in. Neither see a fiscal policy response from the US, but both expect it in the Euro-area.
• Finally, both are bullish equities though cautious in the short-run.
Why does this matter? Two major asset managers sound remarkably sanguine in their global outlook. They expect a continuation of the past few months into 2020. Their take on Euro-area fiscal stimulus appears optimistic given German rhetoric on the topic. They also seem surprisingly sanguine when it comes to valuations.
Mervyn King: Economic Policy in a World Turned Upside Down (IMF Podcasts, 27 min listen) Mervyn King, former Governor of the Bank of England, outlines the current state of global growth. He warns that the failure to dramatically change economic policy could risk another financial crisis.
• Makes a case for secular stagnation. Global growth was over 4% every second year prior to financial crises. But post-2008, growth has not touched 4% in any year, despite higher global debt relative to GDP.
• If the problem of last crises was too much borrowing and too much spending, then the problem today is too much borrowing and too little spending. King is surprised there is so much resistance to the hypotheses of secular stagnation.
• Weak growth reflects a fall in either underlying growth potential or unusually persistent negative shocks. Neither monetary nor fiscal policy can easily rebalance the economy. Radical uncertainty reduces the sensitivity of consumption and investment to policy actions.
• Extreme uncertainty over future prices is holding back the investment required to stimulate production and support sustainable growth. IMF trade uncertainty Index has risen sharply after 20 years of low levels. Other uncertainty indices are similarly high.
Why does this matter? King puts a lot of weight on trade uncertainty, yet weak growth was in place before Trump. His case for secular stagnation appears strong, however. Certainly, the crisis has scarred various parts of the economy. King does propose an argument for ex-ante political settlement under which liquidity is created in times of crises, but whether that could be work in today’s political world is another question.
Reviewing the Fed’s Financial Stability Report (JP Morgan Economic Take, 9 min listen) Jim Glassman, Head Economist at JP Morgan Commercial Bank, reviews four financial vulnerabilities from the Fed’s report:
1. Asset valuation. Stock markets are expensive according to traditional metrics but a stable earnings outlook currently justifies valuations. Commercial real estate performance is also in line with the historic averages.
2. Leverage. Household leverage has expanded to $10 trillion since the 1990s but income has increased more than debt (Debt to Income ratio down from 136% in 1990s to 98% today). Business sector debt has increased to 75% of GDP, but the profits of the firms have increased faster.
3. Financial Sector. The sector is stable with low delinquency and default rates.
4. Funding market. Finance players are less reliant on wholesale sources of funding and banks are more liquid due to regulatory changes following the 2008 crisis.
Why does this matter? JP Morgan and the Fed take a sanguine view of financial risks. They appear to be looking out for a repeat of the 2008 crisis, rather than a different type of crisis. Meanwhile, corporate earnings momentum has worsened, trade uncertainty clouds the outlook, and there is little mention of market liquidity issues. The world does feel low risk.
Ian Bremmer on Populism (Talks at GS, 30 mins listen) Geopolitical expert and Eurasia Group president, Ian Bremmer, discusses the drivers behind populism.
• Rising populist sentiment is attributable to income inequality, rising immigration, growing automation of jobs, and the way in which information flows (social media) in today’s society.
• Populism is growing not in just western economies but also in emerging ones – India and Brazil, for example.
• Having a populist government can impact foreign alliances, especially if allies are globalist in nature. Bremmer cites how a lot of traditional American allies are becoming part of the Chinese one belt road initiative despite US criticism.
Why does this Matter? The forces behind populism are global and here to stay. Therefore, we should expect more social unrest across the world. Already, we have seen Chile and Colombia added to the list of countries experiencing upheaval. Note well Bremmer’s point on shifting global alliances. It suggests new regional spheres of influence with China to dominate Asia.
Saudi Arabia’s IPO Fail? (NPR, 10 min listen) Samantha Gross, Fellow at Brooking institute, explains why Saudi Aramco’s IPO did not get listed internationally as initially planned but was instead listed locally in Riyadh.
• Gross believes Saudi Arabia were reluctant to expose the inner workings of the largest oil company in the world. An international IPO would bring increased scrutiny of the operations and bring the company under direct control of foreign regulators.
• She argues that the valuation proposed internationally, $1.1 to $1.5 trillion, was lower than the Saudi Arabia had anticipated.
• Finally, Prince Mohammed would like to retain control over the IPO and the outcome.
Why does this matter? The limited success of Saudi Aramco’s IPO could be bundled into the same category as other recent IPO flops like WeWork. However, the geopolitical angle is important. Saudi Aramco will now raise about $25 billion vs the $100 billion targeted in 2016. This complicates the country’s efforts to diversify the economy as per the Vision 2030 project.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)
To receive weekly insights and a filtered lens on macroeconomic and financial market analysis