Economic Analysis
From Dambia Moyo

Dambisa Moyo ... Is the Stock Market Loaded for Bear?

Burgess COMMENTARY
The performance of the stock market since 2009 is more or less what one would expect given the profit performance of companies since that time. Because companies and investors have been behaving with little regard to the long term, the stock market is more or less where it ought to be. This is to be expected since the major metrics only address a tiny part of what ought to be being taken into consideration. Metrics like GDP growth, corporate profits and stock prices which dominate the conversation and create sentiment are no longer fit for purpose, where purpose is to understand the progress and performance of the complete socio-enviro-economic system and how it is working to benefit society, use the environment responsibly and reward owners in an equitable manner. As 'purpose' becomes more and more a driver of investment decisions, and social issues and environmental issues are factored into the analysis of corporate and political (national) performance, then all sorts of changes in asset valuation are going to happen. I won't try to predict what these changes are going to be, but I will observe that while the US economy has been very profitable and has created a lot of financial wealth, it is also one of the most inefficient economies in all of history trashing society and trashing the environment in ways that really are an abomination. Peter Burgess ... http://truevaluemetrics.org
Peter Burgess

Is the Stock Market Loaded for Bear?


Traders work on the floor of the New York Stock ExchangeSpencer Platt/Getty Images

As 2018 progresses, business leaders and market participants should – and undoubtedly will – bear in mind that we are moving ever closer to the date when payment for today’s recovery will fall due. The capital market gyrations of recent days suggest that awareness of the inevitable reckoning is already beginning to dawn.

NEW YORK – In recent days, the initial New Year optimism of many investors may have been jolted by fears of an economic slowdown resulting from interest-rate hikes. But no one should be surprised if the current sharp fall in equity prices is followed by a swift return to bullishness, at least in the short term. Despite the recent slide, the mood supporting stocks remains out of sync with the caution expressed by political leaders.

Market participants could easily be forgiven for their early-year euphoria. After a solid 2017, key macroeconomic data – on unemployment, inflation, and consumer and business sentiment – as well as GDP forecasts all indicated that strong growth would continue in 2018.

The result – in the United States and across most major economies – has been a rare moment of optimism in the context of the last decade. For starters, the macro data are positively synchronized and inflation remains tame. Moreover, the International Monetary Fund’s recent upward revision of global growth data came at precisely the point in the cycle when the economy should be showing signs of slowing.

Moreover, stock markets’ record highs are no longer relying so much on loose monetary policy for support. Bullishness is underpinned by evidence of a notable uptick in capital investment. In the US, gross domestic private investment rose 5.1% year on year in the fourth quarter of 2017 and is nearly 90% higher than at the trough of the Great Recession, in the third quarter of 2009.

This is emblematic of a deeper resurgence in corporate spending – as witnessed in durable goods orders. New orders for US manufactured durable goods beat expectations, climbing 2.9% month on month to December 2017 and 1.7% in November.

Other data tell a similar story. In 2017, the US Federal Reserve’s Industrial Production and Capacity Utilization index recorded its largest calendar year gain since 2010, increasing 3.6%. In addition, US President Donald Trump’s reiteration of his pledge to seek $1.5 trillion in spending on infrastructure and public capital programs will further bolster market sentiment.

All of this bullishness will continue to stand in stark contrast to warnings by many world leaders. In just the last few weeks, German Chancellor Angela Merkel cautioned that the current international order is under threat. French President Emmanuel Macron noted that globalization is in the midst of a major crisis, and Canadian Prime Minister Justin Trudeau has stated that the unrest we see around the world is palpable and “isn’t going away.”

Whether or not the current correction reflects their fears, the politicians ultimately could be proved right. For one thing, geopolitical risk remains considerable. Bridgewater Associates’ Developed World Populism index surged to its highest point since the 1930s in 2017, factoring in populist movements in the US, the United Kingdom, Spain, France and Italy. So long as populism lingers as a political threat, the risk of reactionary protectionist trade policies and higher capital controls will remain heightened, and this could derail economic growth.

Meanwhile the market is mispricing perennial structural challenges, in particular mounting and unsustainable global debt and a dim fiscal outlook, particularly in the US, where the price of this recovery is a growing deficit. In other words, short-term economic gain is being supported by policies that threaten to sink the economy in the longer term.

The Congressional Budget Office, for example, has forecast that the US deficit is on course to triple over the next 30 years, from 2.9% of GDP in 2017 to 9.8% in 2047, “The prospect of such large and growing debt,” the CBO cautioned, “poses substantial risks for the nation and presents policymakers with significant challenges.”

The schism in outlook between business and political leaders is largely rooted in different time horizons. For the most part, CEOs, hemmed in by the short termism of stock markets, are focused on the next 12 months, whereas politicians are focusing on a more medium-term outlook.

As 2018 progresses, business leaders and market participants should – and undoubtedly will – bear in mind that we are moving ever closer to the date when payment for today’s recovery will fall due. The capital market gyrations of recent days suggest that awareness of that inevitable reckoning is already beginning to dawn.
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Dambisa Moyo DAMBISA MOYO Writing for PS since 2013 12 Commentaries Subscribe Dambisa Moyo, an economist and author, sits on the board of directors of a number of global corporations. She is the author of Dead Aid, Winner Take All, and How the West Was Lost. 0 Comments on this paragraph,
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9 in all 9 Comments on this article 9 Comments on this article
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TIM MORGAN Feb 11, 2018 After 2000, with organic growth petering out, we adopted two expedients to sustain a simulacrum of growth. First came credit adventurism, borrowing globally $2.20 for each growth dollar, 2000-08. That's averaged $3.50 since '08. We've since added monetary adventurism, which is showing up in the crippling of ROIs and the crumbling of pension provision (see WEF report). Meanwhile, the economy is being skewed towards the low-value-added activities which are conduits for spending cheap money. This has created asset inflation, and bubbles that logically must burst. Read less Reply
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BARRY ROSENFELD Feb 10, 2018 'For the most part, CEOs, hemmed in by the short termism of stock markets, are focused on the next 12 months, whereas politicians are focusing on a more medium-term outlook.' Maybe in China. I have trouble finding any empirically verifiable arguments that political leaders in (largely Western) democracies have an outlook, a time horizon, that could be described other than short-run and tactical. Authoritarian leaders can indulge in long-term strategies as they have time horizons that justify outlooks that transcend the timetables of elected leaders. Read less Reply
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B WILDS Feb 8, 2018 While history is a great reference point it does not define the future. The idea the economy will simply be able to adjust and grow its way out of many problems we have tried so hard to ignore deifies what history has taught. More on the subject of why we may have a hard landing in the article below. http://brucewilds.blogspot.com/2017/12/hard-landing-scenario-should-not-be.html Read less Reply
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STEVE HURST Feb 7, 2018 As global debt (public debt in particular) is continually growing faster than global GDP something is going to have to give and it will probably be in Europe first rather than the US, with GR leading the way as canary in the EZ mine (again) as its debt servicing marches steadily onward towards more than 50% of GDP; hence the German concern. GR as 3% of the EZ GDP should have had a substantial part of its debt written off. Instead it will now appear a cheerleader before others like Italy walk onto the field. Its a very poor strategy and will likely set a negative market mood when confidence is needed; and concurrent with that it is difficult to see any reason why populism should disappear weakening cohesive action and the 'whatever it takes message' with the result of falling into fractional language. When public debt is not used to boost activity but simply sustain provision it is a road to nowhere as servicing costs can only rise and that is what appears to be going on in Europe. Whether public debt expansion will boost the US is a moot point. If emerging economies have problems they will simply cut provision, an act which is not acceptable to the public in developed economies who will head for the ballot box asap. Read less Reply
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TIM MORGAN Feb 11, 2018 UK could be the canary - total financial sector assets at c 1`000% of GDP spell huge exposure, whatever we think of Brexit. Reply
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PRASHANT KOTAK Feb 10, 2018 The question is, just when will it 'give'? Pretty much the entire developed world, including China, is swimming in a sea of debt. Optimistic sentiment is nevertheless driving forward narratives of 'global recovery' - and countries across the globe are becoming even more leveraged. Although to me the underlying real numbers still look thin gruel, masked by corporate accounting tricks like buybacks and the like. The thing is sentiment bubbles have a habit of bursting. Germany can perhaps dig the rest of the EU countries out of trouble, but I wonder, will Germany be inclined to bankroll the rest next time round if the cost is sacrifices to their own 'lifestyle'? Read less Reply
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MEM461 @GEORGETOWN.EDU Feb 10, 2018 Not only is the answer to that question 'no,' but the US, Japan and China are unlikely to be able to ease themselves out of a burst public debt bubble. Only time will tell has the world reacts when the bills start hitting the mailbox. Reply
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TIM MORGAN Feb 11, 2018 Agreed. Additionally, BoJ now owns about half of all JGBs. In my book, that's monetising debt. Reply
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PRASHANT KOTAK Feb 11, 2018 Something downright 'circular tautology' about that - 'I promise to pay the bearer...with monies I have borrowed from the bearer, and if I run out, why, I'll borrow some more!'
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