A Look at the Global RecoveryJanuary 15, 2015
It is the consensus expectation that the Federal Reserve will be tightening while the ECB is increasing quantitative easing and Japan is maintaining its bond buying that has lifted the dollar. The dollar is now 15 percent higher than two years ago, about to break out higher on technical charts—and already impacting export demand for American goods and services. US exports over the past three months are a scant 1.7 percent higher than a year ago. Sales to Canada and Mexico are up 4.7 percent, while they are down -0.8 percent and -0.9 percent in Western Europe and the Pacific Rim, respectively. The invisible hand is already well advanced in its function of distributing US strength to the rest of the world. We believe that the stimulus from lower energy prices and interest rates will be more beneficial for those that suffered from the manufacturing recession last year—China, Japan, the ASEAN and Europe—than for the US, which was largely unscathed. Just as the consensus bet that interest rates must rise with a stronger economy in 2014 was undermined by weak global growth, we believe the bet that a stronger dollar is a sure thing will be undermined by stronger global growth.
We remain most bullish on China. Simply put, after a global recession, the shift in demand will be toward cheaper goods—and even with rising labor costs, China is the world leader in cheaper. Foreign firms have not been expanding investment in China recently, so any rise in global demand will quickly boost exporters pricing power and profits. Our optimism is not based on Chinese reform, but rather simply on where they sit as the export king in a recovering global economy. Indeed, the push for economic reforms in China may actually be diminished if global recovery provides the jobs and political stability the Party so craves. The Chinese continue to move at an incremental and studied pace on key reforms like property taxes and financial openness. It is likely that a solid global economic recovery will produce beneficial results far quicker than their own limited actions. The same is likely true for Japan, where deep devaluation and a grab for global market share are more likely to be stimulative than Abenomics.
Unfortunately, we have been in an extended period of limited legislative efforts for reform. The dominance of monetary policy initiatives has allowed governments to maintain the status quo rather than doing the hard work of revising economic incentives. Now, lower energy prices are going to bail out many who were just getting to the point of undertaking reforms. Without significant revisions in incentives, we expect the same market forces that caused the latest economic slump will reappear. Thus, while we are bullish on 2015, we are as yet unwilling to extend that optimism to 2016 and beyond.
The preceding is an abridged version of a commentary for McVean Trading and Investments, LLC and has been reposted here with permission of the author.
The ideas and opinions expressed in this blog are those of the author, and they should not be perceived as investment advice or as any other kind of advice.