Thursday, 29 August 2013

3 crises that will dominate the rest of 2013

As the northern hemisphere summer draws to a close, 3 new emerging global crises threaten to dominate the rest of the year. 

Firstly, in the Middle East Bashar Assad's likely use of chemical weapons on his own citizens is likely to draw a military response from the West. Despite talk of a surgical strike and limited intervention, time and again over hundreds of years the Middle East has shown itself to be a quagmire, capable of embroiling even its most reluctant invader.

The Syrian morass pitches the United States against Russia and its mortal enemy, Iran. This local war could easily become a proxy for indirect military conflict between larger global powers, as happened so often during The Cold War.  Western countries have a firm habit of becoming deeply embroiled in local Middle Eastern conflicts.  

The markets are aware of this and the price of oil (and other commodities) has started to respond accordingly. 

Secondly, while the markets may be clear about the impact of a Syrian strike they are pretty much clueless as to where the ongoing rout in emerging markets will end up. Currencies of many important developing markets are in free fall, as the market responds to the forthcoming "tapering" of money printing in the United States and with it the return of higher US interest rates. 

As the Dollar becomes more attractive to investors, the flood of money exiting major emerging markets is threatening to become a deluge and may cause massive currency depreciation in emerging market economies - which now make up half the world economy  (including India, Turkey, Thailand, Indonesia, South Africa and Brazil).  

The real fear here is that the Federal Reserve is embarking on its new course of monetary action without really understanding the impact it will have on the global economy - including in the USA.  If major economies such as India and Brazil suffer a substantial economic meltdown they will be forced to defend their currencies by dumping US dollars and buying up Rupees, Reals and Rand. 

They will do this by selling the huge amount of US debt they own, forcing up the price of US Treasury Bills and threatening to snuff out America's solid economic recovery. The USA no longer lives in an global economic vacuum.

For the BRIC countries themselves the days of easy credit caused by rock bottom Western interest rates are over and we all know what that did to prepherial European economies once the tap was turned off of their decade long debt binge. 

This brings us neatly to the third likely source of crisis for the remainder of this year - the Eurozone - where last week the Germany Finance minister admitted what many have long already known - that Greece will need a 3rd bailout soon. Nothing will happen until Angela Merkel is safely re-elected shortly but following this, depending on the extent of global turbulence from emerging markets, we can expect to see Greece request another haircut of its debt, to bring it down to a level they have some hope of repaying (perhaps 120% of GDP).

The crucial difference is that money written off will be - for the first time - cash provided by Germany a couple of years ago to bail the country out. This will be the first time the German taxpayer has taken a direct hit for keeping the Eurzone together. Many Germans will have realised that the money they "lent" to Greece over the last 3 years would never be re-paid. These loans being written off will be confirmation that their money is gone and will be hard for many Germans to take.

Even though I write this from a beautiful Mallorcan beach where the Mediterranean resorts are full and the tourist towns heaving, large parts of the Eurozone's peripheral economy are unreformed and only tentatively emerging from 2 years of recession.

If the 3rd Greek bailout is not careful managed it could lead to a wider crisis across the Eurozone (particularly in Cyprus or Italy), which will likely take place against military action in Syria and a tense period in the global economic environment.

It is going to be an interesting final few months to the year.

Friday, 23 August 2013

Another American Century?

“So far everyone who has bet against America has lost"
Bill Clinton, 2012

As so often before, speculation of America's demise has been greatly exaggerated. The US economic recovery is strengthening as the decade rolls on and this time America is expanding with a number of unique engines for economic growth. These will solidify its economic recovery and may even mean we are in for another American, not Asian century.

Personally, I have never been one for the chorus of BRIC hysteria we've endured for the last decade. 

The wheels in India have come firmly off the carriage and unsurprisingly last weeks imposition of draconian capital controls have sparked, rather than stopped a creeping sense of economic crisis and currency collapse. Russia will shortly be in rapid decline as coming access to cheap "fracked" energy brings its recent economic clout to a swift demise. Economic growth has stalled in Brazil and this has been reflected in nationwide protests against its rent-seeking state and high cost of living.

China may be stabilising but its banking system is still a Pandora's Box of bad debt. What it contains no-one outside the upper echelons of the Chinese Communist Party knows. The recent inter-bank wobble was a PR disaster for its central bank and a sign of an immature institution struggling to control its gargantuan domestic banking sector.

What we do know is (just like before the economic crash) any recovery in China will be driven by demand for its exports from the United States.

This US demand for cheap Chinese manufacturing will also drive the Eurozone's only powerhouse economy, as China bulk orders the machinery and parts required from specialist Germany companies so it can ramp up its manufacturing machine in the Pearl River Delta. Chinese satellite economies in Australia and Africa will be keeping their fingers crossed this Chinese growth scenario materialises and their commodity booms are reignited.

Once again - as many, many times over the last century - the USA will be the motor that powers the world economy.

It has been like this since the end of the First World War. There is no evidence that this is changing any time soon. Just the opposite in fact.

The US is the only major economy that has cleaned up the toxic legacy of 2008 - unlike in Europe where zombie banks still shuffle on and meaningful reforms are non-existent. In America bad debts have been written down, banks have been recapitalised, property markets have re-balanced and companies themselves are now far leaner.

The "Shale Gale" of cheap, nearly limitless energy will substantially re-shape the US economy in a way we are still struggling to understand. It will also fundamentally alter the geo-political structure of the world as the US moves permanently away from its addiction to Middle Eastern energy.

Gas in America is currently one quarter the price in Japan. Many US companies are now moving advanced manufacturing factories back on-shore from Asia as the cost of energy collapses and years of 20% annual wage growth in China effectively prices these workers out of the market.

Most importantly the long term shortage in many key commodities which we will be experiencing by mid-century (and hardly ever acknowledge) as the population of the Earth approaches 9 billion (particularly in water and food stuffs) will by-pass America by. China can't even feed 20% of its people so is buying up whatever farmland it can in Africa. 

America, on the other hand has no such problem. It is completely food self sufficient and always will be once it controls the worlds largest bread basket in the Mid-West and the Mississippi delta.

Demography is destiny and America's population is young, mobile, entrepreneurial, highly educated and demographically stable. Most of Central and Eastern Europe's population structure is collapsing. Russia's is even worse and China is aging rapidly.

America may have its share of internal problems - a paralysed political system, glaring inequality, too much government debt and unpayable pension promises - but lets be frank here - most countries would love to have its problems.

Paradoxically one of America's greatest strengths is its regular period of self doubt and neurotic reflection (after the Soviet Unions' first space flight, after the Vietnam War and again after 9/11).

Ironically from here in Western Europe it is clear that these bouts of "decline paranoia" actually usher in a period of ferocious capitalist house-keeping - in a way not possible in Europe's socialist market economies.

This internal re-balancing may be ruthless and uncompromising but it has repeatedly set the stage for the next burst of American economic growth. That is what is happening right now and I see no reason for it to change this century.

Please note - this is a synopsis of a longer white paper which will be issued in Q4 2013. Contact me for a copy when it is available.

Friday, 16 August 2013

End of the August curse?

The last couple of years have seen the normally drop dead quiet month of August throw up a number of unexpected economic crises.

Last year the Euro crisis flared up suddenly in Greece and Spain and Europe's  politicians were grumpily recalled from the continents beaches to perform firefighting duties. 

The previous year the US Congress pushed the country to the absolute brink of default, needlessly and for political point scoring.

Thankfully so far this August it has been a lot quieter.

Commodity prices are recovering from their recent historic lows - a reflection of the gradual upturn in global economic growth being led by the United States.

Japan is coming out of its lost 2 decades and the Eurozone is finally leaving recession. There is a chance that China may avoid a hard lending - if the authorities can dealing with the bursting of a property bubble and a banking sector festooned with hidden bad debts.

The real and continued growth story is in the United States. A constant and on-going flow of economic indicators this year has pointed to a real recovery in the worlds largest economy. This is great news.

It also points to a gradual end of QE in the US, with the printing presses being mothballed and interest rates starting to rise. The US dollar is entering a rare period of economic strength. 

Elsewhere commodity economies like Australia, Canada and New Zealand will be praying the Chinese economy ticks up again and growth follows a likely growing US demand for imports. Australia and Canada in particular have large intact property bubbles, the deflation of which will be anything but painless. 

Back in January we published our annual Global Perspectives white paper predicting the 5 key trends in the global economy in 2013 (Available here).

Looking back - having past the midpoint of this year - we did a pretty good job.

The US economic recovery has continued as we expected, China has underpinned it's slowdown with a huge infrastructural expansion, the Germany election next month has completely dominated the year in Europe and prevented any attempt at substantial economic reform, commodities prices are starting to rebound as we expected in the later half of the year and exchange rates have remained volatile - with the Japanese Yen and Australian Dollar in particular gyrating wildly against the dollar.

You can read our economic predictions for 2013 (Available here) and decide for yourself how accurate our predictions were for the year.

Friday, 9 August 2013

"America’s top 25 hedge fund managers make more than all the CEOs of the S&P 500 combined”​​​​

"America’s top 25 hedge fund managers make more than all the CEOs of the S&P 500 combined”​​​

The Economist, October 2012

Hedge Funds have had an incredible run over the last 2 decades. The annual salaries and bonuses of the most successful managers have been amongst the highest paid to anyone, anywhere, ever.
Astronomical wealth has kept everything from top end international property to luxury goods to private yachts afloat for many years.

This is starting to change.

Multiple headwinds of lacklustre performance, increasing competition and invasive regulation are starting to bite.

This new Global Perspectives white paper examines these trends and asks the question - have hedge funds reached the end of their "Gilded Age"?

Click here to read the full white paper