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Hidden Dangers Could Sting Investors at Any Time

Hidden Dangers Could Sting Investors at Any Time

By    |   Tuesday, 18 February 2020 01:22 PM

U.S. data on Friday showed the U.S. consumer is still doing OK, but not necessarily roaring ahead.

Nevertheless, there is also the question about whether structural shifts in spending patterns are being correctly reflected in retail sales data. Household consumer spending numbers are probably a better indicator of the health of the U.S. consumer.

Personal spending rose 0.3 percent m/m in December, in line with market expectations, and was mainly boosted by spending on health care. Consumption of nondurables jumped 0.9 percent and services edged up 0.3 percent while spending on durable goods dropped 0.8 percent. In 2019, households spending grew by 4 percent, the least since 2016.

For now it remains clear the U.S. consumer is still perfectly able to provide a very solid foundation of growth in the United States. It’s the investment story that remains the problem.

Meanwhile, over in Japan, the economic problems seem a little broader. Fourth quarter GDP collapsed 6.3 percent on an annualized basis. Now, annualization always exaggerates trends. This is particularly true when there are one-off events as there were in Japan at the end of last year with both the introduction of a sales tax increase and the effects of a typhoon.

So, Japan’s fourth quarter GDP number itself should not be read in too alarmed fashion, but it was however significantly worse than consensus. This is now going to prompt a lot of hysteria in certain media outlets and we will hear the word “recession” a lot. Recessions happen whenever the media decide that they happen.

Investors could take note that there is no universal economic definition of what a recession is. The Bureau for Economic Analysis of the U.S. Department of Commerce says that while negative GDP growth and recessions closely track each other, the consideration by the National Bureau of Economic Research (NBER) of the monthly indicators, especially employment, means that the identification of a recession with two consecutive quarters of negative GDP growth does not always hold.

So, a country like Japan with a declining population is a lot more likely to have negative GDP growth than a country like the United States with a rising population and because of that it would be wise to ignore the hype and focus on what is actually going on in the Japanese economy in the first quarter of this year without panicking about what to call it.

Japan’s December industrial production fell, but not in a particularly surprising way.  

Over in China, the government has been offering more economic stimulus with a pledge to reduce corporate taxes and an interest rate cut, the Wall Street Journal explained.

Stimulus was always expected in the wake of the coronavirus and means that, at least for now, economists have changed their pattern of Chinese growth. Obviously, lowering the growth rate in the first quarter, but then raising expectations after that, when the stimulus kicks in. This is a pattern that has been seen in the wake of other tragedies like for example the U.S. 9/11 terrorist attacks.

Possibly offsetting the stimulus there is still a “low” level tension between the U.S. and China over the coronavirus. There have been some weird conspiracy theories, like for example in Russia, where they are being spread even on prime-time news programs, the BBC reported.

That said, all this, and of course because of much more, does suggest investors could be prudent/wise that any hopes of a phase-2 U.S.-China trade deal should better be downplayed.

Anyway, many economists never had much hope for a “real and complete” phase-2 deal. It’s a one and done situation frankly, but there may have been and there still may be some people in the financial markets that cling to optimism.

With all what’s going on for the moment within a sea of unknown unknowns, in my opinion, investors could do well playing it safe as much as they can and try to have as much as possible U.S. based cash-equivalent investments, like for example U.S. Treasuries.

Yes, there are way too many hidden dangers that could take investors by surprise at any moment.

As they say in Japan: “The one who knows nothing, fears nothing.”

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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As they say in Japan: “The one who knows nothing, fears nothing.”
investors, dangers, japan, china
Tuesday, 18 February 2020 01:22 PM
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