Tags: capital | demand | investors | economy

'We're Not in a Capital-Constrained World; We're in a Demand Constrained World'

Friday, 24 April 2015 07:28 AM Current | Bio | Archive

This week, so far at least, markets didn’t find any reason for losing their broad-based inclination to complacency, which in fact is a confirmation of the new normal.

There was no Grexit or some kind of a European fabricated solution for Greek haircuts that would mean nothing else than some form of “partial” defaults, and there was no collapse in global growth, and last but not least, there was no sign whatsoever the Fed would embark sooner rather than later normalizing its monetary policy.

We saw Japan’s benchmark Nikkei 225 index closing for the first time in 15 years above 20,000, but still well below the 38,915 peak it reached on December 29, 1989. On Thursday, the Nasdaq composite closed at an all-time high of 5056, which was only a mere 7.42 points higher than where it was 15 years ago.

So, one could say “So far so good,” which shouldn’t mean “Past performance does not guarantee future results.”

Keeping in mind the devil is most of the time in the details, we got on Thursday by many not well-known, but nevertheless the very well done overview of world trade and world industrial production by the Dutch “CPB Netherlands Bureau for Economic Policy Analysis.”

Volume of world trade fell 0.9 percent in February after a revised 1.6 percent decline in January.

Trade momentum was for the first time negative since April 2014 at -0.6 percent in February (non-annualized) after +0.5 percent in January. Import and export momentum receded in both advanced economies and emerging economies. Export momentum turned negative in advanced economies. Import momentum became more (and heavily) negative in emerging economies.

World industrial production growth momentum decreased in each major country block but the Euro Area. Of course, these data aren’t indicating new trends yet, but they are surely important enough to keep an eye on.

When we take a look at the actual and trend of nominal GDP growth (percentage) in advanced and emerging economies as published by the Economic Cycle Research Institute (ECRI) we see the U.S., Canada and the UK all continue to show stable relatively good growth patterns, while the 4 big eurozone economies (Germany, France, Italy and Spain) plus Japan display lackluster patterns and the big emerging economies China, India, Korea and Mexico still face downward growth patterns.

All this doesn’t make it easy to any investor, which doesn’t mean “trader” at all, who is inclined to invest in the near term and by doing so, would overlook the economic fundamentals that have been, to very large degree, been obscured by the now global easy monetary policies, which can’t last forever, but for the moment remain well in place.

In this context, the President of the NY Fed, William Dudley, gave this week a somewhat interesting speech.

He expects GDP growth for the first quarter to be quite weak with growth only at around a 1.5 percent annualized growth rate. On the dollar the roughly 15 percent appreciation of the exchange value of the dollar since mid-2014 probably will reduce real GDP growth by about 0.6 percent this year.

At the same time and because the U.S. remains a net importer of petroleum, lower oil prices since June of 2014 will benefit the U.S. oil import bill by about a 0.5 percent of GDP.

He also says: “Longer-term household inflation expectations have been well maintained through this period of very low inflation as shown in our Survey of Consumer Expectations.

This should reinforce the effect of a higher level of overall resource utilization in slowly pushing inflation back towards the FOMC’s 2 percent objective.”

On the coming liftoff to normalization of Fed monetary policy he says: “… we will simply be moving from an extremely accommodative monetary policy to one that is only slightly less so … How fast the normalization process will proceed depends mainly on two factors: how the economy evolves and how financial market conditions respond to movements in the federal funds rate target…”

That’s it, and now let’s hope it all remains as simple like that, but I have my doubts.

Anyway, as things stand today: “We’re not in a capital constrained world; we’re in a demand constrained world,” and that’s not a balanced situation.

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Anyway, as things stand today: “We’re not in a capital constrained world; we’re in a demand constrained world,” and that’s not a balanced situation.
capital, demand, investors, economy
Friday, 24 April 2015 07:28 AM
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