Today the distinguished Lex Column of the Financial Times provides a suggested global macro asset allocation for a world where – as in the title of the column – the world economy Goldilocks meets the Bears. It is interesting that my long running theme of a global Goldilocks economy (with high growth, low inflation and perky [...]
The recent turmoil in emerging markets has affected a wide range of economies, both those with better fundamentals and those with macro and financial vulnerabilities. Indeed, global factors external to the emerging markets – rising global stagflationary concerns, tightening of monetary policies in the G7, increased investors risk aversion and de-leveraging, reduction in exposure to [...]
As I predicted last March: “Today Iceland: Tomorrow Turkey, Hungary, Australia, New Zealand, Spain, U.S.”… Soon: the Coming US Hard Landing…
Last March the current financial markets turmoil had not started yet and investors were still deluding themselves that easy liquidity would allow them to continue their “poor manager’s source of alpha” returns (i.e. the easy returns that even mediocre investors can get from simple carry trades when interest rates are low and money is dirt cheap, to use the [...]
What explains the recent turmoil in Turkey’s financial markets? How much is it due to changes in global or external conditions as opposed to domestic vulnerabilities? Will Turkey weather the current storm or is it at risk of experiencing another serious financial and real economy crisis? These are complex questions that require a detailed analysis [...]
12 Reasons Why the World Will Not De-Couple From the Coming U.S. Growth Slowdown…Or “Why When the U.S. Sneezes the World Gets the Cold”…
Recent economic data from the U.S. confirm that my early 2006 out-consensus bearish call for a sharp U.S. economy slowdown in 2006 is highly likely to turn out being correct. At this point, the issue is not anymore whether such a slowdown will occur but, rather, how sharp such a slowdown will be. I forecasted [...]
I just came back from a trip that took me to South Africa, Turkey and the U.K. In Istanbul I got a chance to present a new paper – written with my RGE co-author Christian Menegatti – on risks and vulnerabilities in Central Europe and South Europe (a powerpoint version is available here as a [...]
Mid-Year Review of my January 2006 forecasts for the US and Global Economy This Year: My Bearish Call on Track to Be Right
In January 2006, at the time when the market and official sector consensus was for another Goldilocks year of high U.S. and global growth, low inflation and rising asset prices, I made the following out-of-consensus and bearish 19 forecasts:
- The US economy will slow down in 2006, especially in H2, towards a 2-2.5% growth rate
- The U.S. and global housing bubble will burst – or better fizzle-out - in 2006.
- The global economy will also slow down in 2006 towards a 3.0% growth rate from 4.3% in 2005.
- The US current account deficit will worsen in 2006 towards a $900b deficit and global current account imbalances will become larger.
- The US fiscal deficit will worsen in 2006 adding to the US twin deficits.
- Rising protectionist pressures in the US and Europe.
- China will allow its currency to appreciate by at least 10% and the rest of Asia, including Japan, will follow.
-The dollar will also weaken relative to other floating currencies but by less than relative to China/Asia.
- The BW2 regime will start unraveling driven by less forex reserve accumulation in China/Asia and the movement of their currencies.
- US long term interest rate will head higher in 2006 driven by the BW2 unraveling and other global factors
- Oil prices will head again above $70 a barrel before falling once the US/global slowdown starts.
- The Fed Funds rate will go above 5% and the Fed will not be able to react to a US/global slowdown by easing rates.
- The ECB and BOJ will start tightening monetary policy and the global easy liquidity conditions will start to reverse.
- Equity markets will do poorly, especially in the U.S.
- Geo-strategic and geo-political risks will remain high and they will affect asset markets.
- High risk that a major US corporation will enter bankruptcy.
- Rising political tensions deriving from globalization and the pressures that it puts on workers in the US and Europe.
- Rising spreads on a variety of risky assets and increases in asset prices volatility.
- Increased probability of a systemic risk episode.
It may be a little early to declare victory but, in most dimensions, my bearish views on the US and global economy are starting to emerge as quite correct. The Three Bears scaring Goldilocks (that I have been referring to since the beginning of the year) – high oil prices, a flattening housing market, and rising inflation leading to higher policy rates than expected – are starting to kick in and leading to a sharp U.S. economic slowdown. Q2 growth may already be in the 2-2.5% range that I predicted in January and is likely to further decelerate in H2. As I predicted, oil would go above $70 a barrel because of geopolitics (Iran, Nigeria) and have a stagflationary impact.
The rapid increase in commodity prices in the last few years accelerated in the last few months, followed by a major and sudden fall last week that appears to be continuing today. This rollercoaster in commodity prices has renewed the debate (see Roach, Hamilton, CERA, Riholtz, Rassou and others) on whether the rapid rise in commodities prices represents an asset bubble – possibly ready to burst soon – or can rather be explained by economic fundamentals. There are many questions to be addressed. Can the increase in commodity prices be explained only by economic fundamentals? Is the sharp fall last week a temporary blip or the beginning of the bursting of this asset bubble? Could the fall be explained in terms of changing economic fundamentals?
Formally proving the existence of asset bubbles is never easy and some distinguished scholars – Garber, Fama – believe that asset price bubbles never occur and that any asset price change can be explained by some economic fundamentals.
Thus, the case for bubbles versus fundamentals must rely mostly on circumstantial – as opposed – to hard proof (something like the recent “duck test” of Baum). Keeping this caveat in mind, I will analyze a number of fundamental explanations of the recent increase in commodity prices and try to assess whether these fundamentals and their changes can explain the recent movements in commodity prices. The fundamentals/explanations that have been given for the recent rise in commodity prices include:
- High global growth leading to a sharp increase in world demand for commodities
- The rise of China and other emerging market economies and their demand for commodities
- Lack of supply and limited excess capacity because of low investment in commodities production
- An increase in global expected inflation
- Easy global liquidity conditions, low interest rates and low risk aversion leading to asset price increases
- Existence of speculators and new investors and asset instruments in the commodity markets.
Let us consider each of these fundamental explanations in sequence; and then discuss whether – and how much – a bubble could account for the recent rise – and fall – in commodity prices.
[The rest of this long research note is avaialable only to RGE Premium Content users]
After an already difficult week last week, today emerging markets experienced a massive bloodbath (the largest currency, equity and bond lossses in two years). And indeed last March I wrote a controversial blog (titled “Today Iceland: Tomorrow Turkey, Hungary, Australia, New Zealand, Spain, U.S.?“) putting in the same basket countries such as Iceland – that at the [...]
The is an ongoing debate on the direction that economic policies are taking in Latin America. One view, initially presented by