Let’s start close to home with an idea you might have seen here before: the UK economy is vulnerable to an external shock because the pound is overvalued.
The Markit Purchasing Managers Index came in at 53.3 this morning. The figures still indicate growth in orders to Britain’s service sector. But only just, at around 0.3% for the third quarter, according to Business Insider’s Mike Bird.
The service sector is important to the expansion of the British economy and to balancing the current account deficit. The service sector generates a surplus.
This reading is the weakest since April 2013. Is it a sign of things to come?
Maybe it was just a bad month. But it’s one of those signals to watch for. When you’re running a trade deficit in real goods, your surplus in service exports keeps the economy growing. Britain is still the fastest growing economy in the G7. But if the rest of the world isn’t buying, watch out.
Stocks pricing in lower growth
Eleven trillion dollars is still a lot of money, even in this age of funny money. Global stocks saw $11trn wiped off of their market capitalisation in the fainting spell of the last three months. And now, the secret’s getting out.
The secret is that neither emerging markets (China) nor developed markets (Japan, Europe) are growing ‘above trend’. The current trend is 3.5% growth in emerging markets. That’s 1.5% below the trend of recent years. There are two explanations for that.
First, the commodity bust hurts resource-based economies. Those economies (like Brazil) have made hay selling raw commodities to China, which itself has been chugging along at 7% growth for years. China’s slowdown passes on the pain to the rest of the emerging-market world.
By the way, I’m not including Australia as an emerging market. It has a world-class rugby team, the rule of law, nice beaches and cold beer. But if you were to look at it purely on its merits, in economic terms, you’d see a high-debt country where national income is falling due to the collapse in export prices (commodities) and the lack of strong business investment in the rest of the economy. Also a big old housing bubble.
But I digress. The second explanation of ‘below trend’ growth in the entire world – and that includes Japan, the US, Europe, and the UK – is that you can only ‘bring forward’ so much growth through credit before you have massive over-capacity. You can stimulate demand all you want with low interest rates and easy credit. But once the artifice ends, there’s nothing ‘real’ to back it up.
That’s about where we are now. We’ve been steaming ahead methodically and buying growth with low interest rates. Growth for its own sake – or the for sake of politics – eventually reaches a natural limit. That limit is whether the return on an investment exceeds the cost of paying interest.
The currency wars that Strategic Intelligence editor Jim Rickards writes about are an attempt to ‘steal’ growth through currency devaluation. It’s a zero sum game. We talked about it last week on the podcast with Jim’s co-editor Ben Traynor.
The danger in a world where you’re fighting for your share of smaller growth is that it leads to more conflict. Have a look around. Syria. Afghanistan. The South China Sea. The seeds of conflict are blowing up everywhere.
Russia’s Mid-East play
Let me be the first to say I have absolutely no idea what’s going on in Syria right now. It’s hard to really trust anything you read these days. The line between propaganda and news has been thoroughly blurred.
But – and this is going back to my days writing a newsletter called Strategic Investment – it’s probably safe, or at least useful, to see almost everything in the Middle East as a conflict between Saudi Arabia and Iran. The Saudis have traditionally enjoyed American backing.
All that seems to have changed, not least because the Saudi crashing of the oil price targets America’s shale revolution. Vladimir Putin has expertly surveyed the situation and made his move. The Gulf States back the fall of Syrian President Bashar Assad. The Russians and the Iranians back Assad.
The risk now is that wider regional war so feared in years past. If Iranian ground troops enter Syria, will Israel be involved? What will the Saudis do? Or will it all boil all along as it’s always done, with one strong man replacing another?
As I said, I have no particular expertise or insight into these affairs. But these things are happening because of the decline of the United States as a global power. You may see that as a good or bad thing. But the objective fact is that the US appears to be neither willing nor able to roll back the renaissance of Russia or the rise of China as a Pacific Power.
That should make the last 472 days of Barack Obama’s time as president pretty interesting. And by ‘interesting’ I mean full of conflict and thus dangerous to investors. We’re working on how to keep you better informed of geopolitical events and their effect on markets. Stay tuned for news on that.
Category: Economics