Much to win; far more to lose Marketing Communication

Transcription

1 The Great Gamble Much to win; far more to lose Michael Every Senior Asia-Pacific Strategist Marketing Communication Jan Lambregts Global Head of Markets Research

2 All to play for Global recovery Market stability Central bank credibility Global stability! 2

3 Global Recovery 3

4 Global PMI Still winning for now Global upturn Jun-14 Jun-15 Jun-16 Jun-17 Manufacturing Services 4

5 Months of US economic expansion But very long winning streak Summer 219 will be longest US cycle ever

6 % GDP But all the chips on just one table Where s the restructuring? Mar-52 Mar-72 Mar-92 Mar-12 US capital investment Where s the investment? China capital investment 6

7 China fiscal deficit, % GDP Playing last card since 28! China s fiscal deficit 13% of GDP during economic upswing! What will it be when GDP slows?! Do global markets know they are supported by this fiscal policy? -16 Mar-94 Mar-99 Mar-4 Mar-9 Mar-14 7

8 3MMA y-o-y% China aggregate financing, cumulative 12M rolling, USDbn House of cards 12 1 Borrowing had been slowing growth will follow in 218 if sustained 4, 3,5 3, Borrowing just moves from one hand to another doesn t really stop ,5 2, 1,5 1, 5-2 Jan-6 Jan-9 Jan-12 Jan-15 All-system financing + local government bonds -5-1, Jan-3 Jan-6 Jan-9 Jan-12 Jan-15 CNY Loan FX Loan Entrusted Loan Trust Loan Banker's Acceptance Bill Net Bond Equity Financing Local govt bonds 8

9 China Incremental Capital Output Ratio How to lose that borrowed money Jan-9 Jan-93 Jan-96 Jan-99 Jan-2 Jan-5 Jan-8 Jan-11 Jan-14 2 units of input = 1 unit of 1 output ICOR (3Y-MA) 9

10 ILO labour productivity, constant 25 USD y-o-y% But everyone s a loser ILO labour productivity, constant 25 USD y-o-y% UK US EU28 JP CH - RHS 1

11 Real wage growth, y-o-y% Unemployment, % Plenty of other losers out there 14 Unemployment 12 low but still no real wage growth! True 1 in Anglo US and UK; True 8 in Lucky Australia; Becoming true in Europe too (ex-germany); 6 True 4 in Japan.where next? 2 Mar-5 Mar-7 Mar-9 Mar-1 US EZ JP UK AU How -2much longer until workers finally win or we realize all our economic models are wrong! -4-6 Mar-7 Mar-1 Mar-13 Mar-16 Can central banks afford to be wrong either way? US FR JP UK GE AU 11

12 The game is rigged Workers 44% of US citizens can t find $4 cash in an emergency situation: Fed Survey Asset rich Wealth of 8 richest people now Consensus: equals that of 5% of the rest Polarization of the world: dangerous 217 Oxfam survey No consensus: What we do about it! 12

13 Global Stability 13

14 Can we keep winning?!?? 14

15 Brexit poker face 2.2 BREXIT NEGOTIATIONS: 2. Weak UK coalition government UK politics remain volatile Red-line issues of immigration, ECJ Will stronger Europe compromise? Catastrophic Hard Brexit looms? 1. Jan-1 Jan-6 Jan-11 Jan-16 GBP/USD 15

16 NFIB Royal running bust? Jan- Jan-5 Jan-1 Jan-15 US NFIB small business optimism US consumer confidence Consumer confidence 16

17 Global Steel production, tonnes Walking away from the table? 14, 12, 1, 8, 6, 4, 2, China % of global steel production US Section 31 investigation into China trade practices launched August 14 Could take a year, likely to see US tariffs and then trade war? NAFTA also renegotiated Jan- Jan-5 Jan-1 Jan-15 CH US JP GE FR IT SP KO UK RU UR BR IN TU 17

18 Playing same cards? May: Brexit means Brexit Trump: America First Turnbull: Australians First English: Kiwis First Macron: Buy European ASEAN Australia Brazil Canada China West Europe East Europe India Japan Mexico NZ Russia S Africa UK US Nationalism Immigration Protectionism Fiscal stimulus 18

19 Playing same cards? May: Brexit means Brexit Trump: America First Turnbull: Australians First English: Kiwis First Macron: Buy European ASEAN Australia Brazil Canada China West Europe East Europe India Japan Mexico NZ Russia S Africa UK US Nationalism Immigration Protectionism Fiscal stimulus 19

20 Spin it! Post-WW2 US order is crumbling But no sign of what can replace it Clear in politics, power shifts (When) do we see market impact? 2

21 Market Stability 21

22 199 = 1 Durable goods, USDm Everyone s a winner (?) 7 35, 3, , 25, 2, 15, 2,5 2, 1,5 1, 5 S&P Jan-92 Jan-2 Jan-12 1, Jan-92 Jan-2 Jan-12 S&P Euro Stoxx 5 FTSE 1 Durable goods S&P 22

23 House prices, January 26 = 1 China average per meter sales price, y-o-y% Excess exuberance AGAIN! Jan-6 Jan-9 Jan-12 Jan-15 Jan-18 UK US CA CH AU JP Jan-6 Jan-9 Jan-12 Jan-15 Tier-1 Cities Tier-2 Cities Tier-3 Cities 23

24 VIXX % Markets encourage us to gamble TRUMP FX vol Jan-94 Jan-4 Jan-14 S&P VIX - LHS Implied 3M FX vol - RHS. Jan-16 Jul-16 Jan-17 Jul-17 US 1-Y yield 24

25 Balance sheet change, 3MMA The House wants you to win! Jan-9 Jan-11 Jan-13 Jan-15 Jan-17 FED ECB BOJ PBOC BOE SNB 25

26 But 26

27 Central Bank Credibility 27

28 % Losing our shirts Recession Tequila crisis Central banks want to hike to show they still can Wall St Crash Asian crisis Tech bubble But every time they do, we lose our shirts Global Financial Crisis 4 2 If PBOC doesn t follow, where does CNY go? Jan-85 Jan-95 Jan-5 Jan-15 Fed Funds 28

29 Commodity Index Base rate, % That s a VERY big bet!! Inflation breakeven Jan-99 Jan-4 Jan-9 Jan Jan-7 Jan-1 Jan-13 Jan-16 Bloomberg Commodity Index Fed 5-Y Fwd Breakeven Inflation Rate FED ECB BOJ China 3M SHIBOR 29

30 PBOC Assets, CNYbn Ratio Can China control this? 3, 25, 2, 15, 1, USD/CNY 5, Mar-2 Mar-7 Mar-12 Mar-17 Other NFI Financial Corp Depository Corp Government Foreign Asset Mar-2 Mar-7 Mar-12 Mar-17 Ratio PBOC Foreign Assets/Domestic Assets USD/CNY 3

31 bp A steep bet(?) Or a flat one The flatter this goes, the more you can bet on central bank error Jan-7 Jan-12 Jan-17 US 2s-1s Germany 2s-1s China 3s-1s 31

32 The house really loses big time Policy Error Austerity Event risk Rate hikes 32

33 So is tightening just a joke? Rates close to neutral! QE could be expanded! Prudent policy! Neutral rate talk means nothing! Exit strategy > lower CPI forecast! 33

34 If things go wrong, reverse bets RATE HIKES WOULD TURN BACK TO RATE CUTS Q.T. WOULD TURN BACK INTO MORE Q.E. BUT THIS WOULD SHOW: CENTRAL BANKS BET WRONG THEY CAN T RAISE RATES ABNORMAL IS PERMANENT 34

35 Same old tricks won t work Our policy has created 4.5 million jobs in the Eurozone so far. That s the reality, the rest is speculation. Draghi, 11 May 217 That equals EUR555,555 per job and mostly low paid Is that a good way to spend your chips? 35

36 Fiscal deficit, % GDP (New) Deal again? Fiscal forward 4 2 X if it works for China -16 Mar-94 Mar-99 Mar-4 Mar-9 Mar-14 US EZ UK CA AU JP CH* 36

37 Defence spending, 215 USDbn Shall we call security? 2, 1,8 1,6 1,4 1,2 Trump lays out hike in military spending Feb 27, BBC Asia ramps up military spending as old order shakes Jun 1, Nikkei Review EU to outline plan to use funds for defence Jun 5, The Guardian 1, Africa Americas Asia and Oceania Western Europe Central Europe Eastern Europe Middle East Canada to increase its military spending by 73% Jun 8, BBC Invest in Britain s Armed Forces to boost the economy says PwC Jun 26, The Telegraph 37

38 USD bn Or do we all go all negative? 14, 12, Countries where use of cash being restricted or restrictions being discussed 1, 8, 6, 4, 2, Jan-12 Jan-14 Jan-16 Negative yield assets 38

39 Per USD Everyone loses 2, 18, 16, 14, 12, 1, 8, 6, 4, 2, Jul-1 Jul-13 Jul-16 Bitcoin Gold 39

40 So, a Great Gamble Central banks are going all in The bet might pay off: Cyclical recovery - Record high stocks Record house prices - Rate normalization Stable China/CNY - Populism ebbing(?) But unless we see REAL WAGE GROWTH the odds are against them and the stakes are sky high 4

41 All to play for Politics normal; Wages rise; Reforms proceed; Fiscal stimulus; Growth holds up; Rates normalized; CNY stable; Silk Road works; Social QE if needed More populism; Wages flat/fall; No reforms; Fiscal austerity; Over-tightening; CNY falls; Silk Road stalls CNY collapses; FX Wars; Trade Wars; Actual War; New mega-qe ; Monetary chaos; Free markets 41

42 How to play it VOL RATES QE VOL RATES QE CURVE USD CNY CURVE USD CNY 42

43 How to play it 43

44 Important notice Disclaimer Rabobank London, Thames Court, One Queenhithe, London EC4V 3RL +44()