Tags: China | US | oil | invest

US Is Not the World's Growth Engine and It Will Never Be

Friday, 27 March 2015 09:17 AM Current | Bio | Archive

Today could become an interesting day as far as Federal Reserve speak is concerned. Fed Chair Janet Yellen will give a speech on monetary policy at a San Francisco Fed conference at the end of the New York stock market's business hours.

Before that, Fed Vice Chair Stanley Fischer will speak to the Bundesbank conference on bank regulation in Frankfurt, Germany, which in contrast to Yellen's speech isn't expected to have the potential to move markets significantly.

Talking about U.S. markets for a moment, the U.S. Treasury's Office of Financial Research released a report that says U.S. stock prices are high by historical standards. The report states: "Although investor appetite for equities may remain robust in the near term, because of positive equity fundamentals and low yields in other asset classes, history shows high valuations carry inherent risk. Based on the preliminary analysis presented here, the financial stability implications of a market correction could be moderate due to limited liquidity transformation in the equity market. However, potential financial stability risks arising from leverage, compressed pricing of risk, interconnectedness, and complexity deserve further attention and analysis."

In the context of the long-term investor, I'd surely take that analysis into account in case you'd decide to take some precautions and/or to (re)position yourself.

As the old saying goes, "The art is not in making money, but in keeping it."

Looking at oil for a moment, I can't see how the developing conflict in Yemen could in a significant way impact oil markets where oversupply remains the main downward driver. That said, my preference for waiting until the bottom falls out of the oil price hasn't changed and I still expect West Texas Intermediate oil to slide further to the $30 per barrel zone or even below that.

Once we are there, I think the time could become right enough to take a closer look at longer-term positions in oil or oil-related investment vehicles.

Keep in mind Saudi Arabia's position on not cutting its production and blaming non-OPEC producers for the present oil glut hasn't changed at all, while world growth remains anemic and the path for the dollar to strengthen further remains well in place. Of course, all that could change at the blink of an eye for geopolitical reasons.

I think, world growth will at least over the short to median term continue to grow at a too low rate to be good. Besides, we should not forget the U.S. is not a world growth engine and it will never be. The main growth engine has been and still is China, but when Chinese President Xi Jinping calls China's slower growth rate the "new normal" then we should accept the 10 percent-plus growth story we have seen since 2008 is definitively over, which of course will continue to have a lasting negative impact on commodities and commodity-exporting economies, like Brazil, Canada, etc.

Please don't take my wrong, I'm not suggesting China is closing in on a hard landing, but there is no doubt it continues to lose momentum.

I think any long-term investor would do well to take a look at the following facts about China:
  • Industrial production rose 6.8 percent year-over-year in the January-February period, which was the weakest expansion since 2008.
  • Retail sales rose 10.7 percent from the same period last year, which was the weakest pace of expansion in a decade.
  • Fixed-asset investment rose just 13.9 percent, which was the weakest expansion since 2001.
  • Electricity consumption fell 6.2 percent year-over-year in February, which speaks for itself.
  • The HSBC manufacturing PMI dipped to 49.2 in March, with new orders at an 11-month low, new export orders falling for a second straight month and worst of all, the employment subindex contracting for the 17th straight month.
When we consider all these facts together, we could ask ourselves what it would take for China to return (hopefully never) to its own forms of quantitative easing, which would imply once again more uncertainty (volatility) in the markets and perhaps a weaker yuan. Of course, we aren't there yet.

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Today could become an interesting day as far as Federal Reserve speak is concerned. Fed Chair Janet Yellen will give a speech on monetary policy at a San Francisco Fed conference at the end of the New York stock market's business hours.
China, US, oil, invest
Friday, 27 March 2015 09:17 AM
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