The great and not really that good are convening in Davos this week to be confronted yet again with the uncomfortable (to them) reality that markets cannot be manipulated indefinitely by politicians, investment bankers or even central bankers, even when they try to act in concert.
In this ‘express’ edition of Economic Insights I offer just two simple headlines:
The global economy is slowing not collapsing
This may disappoint some but is actually quite good news. Most attention this week will be paid to the latest batch of fiddled data ‘outta’ China and the irony is its economy may well be on track but just only at half the speed of official numbers. There will not be much significant data out of the US (after last week’s disappointing Retail Sales and Industrial Production) while that from the EZ will be mainly survey data and at best inconclusive. That will not stop Mario Draghi telling us all on Thursday how effective his policies are proving to be and will be even more so once he has outmanoeuvred the awkward squad led by the Bundesbank. From the UK will come a raft of numbers on Inflation, Unemployment, Average Earnings and Public Sector Borrowing (probably mostly from middling to quite good) but the main interest should be Retail Sales. Evidence so far suggests the Brits were shopping online and on foot in December and they certainly need to stick at it if the UK economy is to keep outperforming the rest of the world.
Investors need to calm down
The main consequences of a global slowdown are that corporate earnings will be lower and interest rates and commodity prices will stay very low. The Big Bucks investors are…er… just too big to buy most individual stocks or bonds and so have to rely on derivatives, which are, of course, what ETFs and other passive funds are all about too. As sophisticated as algorithmic programmes have become they seem to end up in rather simple trading strategies: sell until prices stop falling and buy until they stop rising. Needless to say, things can go wrong without necessarily being ‘Black Swan’ events. The programmes are written by humans just as frail as even the most experienced traders. Right now, selling and/or shorting equities seems to be both a herd instinct and a hedge against scary trades in Oil, commodities and currencies. The selling will have to stop sooner rather than later.
The most dangerous scenario, albeit still somewhat unlikely, is if investors collectively stampede into a crash that provokes a genuine global recession. There are really no policy weapons left if this happens, apart from old fashioned Keynesian public spending and even that is easier said than done. So, if the global economy really were to ‘have a great fall, all the Davos’ horses and all the Davos’ men’ would struggle to put it together again. Meanwhile, somewhere and somehow, some companies will find a way to grow, which happens to echo our own motto: ‘Incrementum inveniendum est’. Amen to that!
Alastair Winter 