Last Thursday, UBS strategist Joni Teves said she saw “no compelling reason for a big gold-price rally or markets selling off”. To tighten her grip on this, her hostage to fortune, Ms Teves added “Growth dynamics are improving, and in 2018, [economic] growth is likely to remain steady….The global macroeconomic picture is looking less risky as most countries are in the expansionary phase of their cycles.”
The underlining is mine, the significance of which I can précis in the following manner:
‘One has to define ‘compelling’, and add that you might see growth dynamics, less risk and most countries expanding, but then that presupposes you’re happy with multivariate unpredictability, fake data and consumers drowning in debt with asset bubbles everywhere’.
The uncertainties are North Korea, interest rates, Middle East instability, Brexit, and Italian viability. I find all of those compelling bordering on terrifying.
By ‘fake’ data I mean statistics measuring only those things that will make the statistics not look utterly disastrous. Inflation, unemployment, bankruptcy and growth all suffer from narrow definitions, arbitrarily changed definitions, pretending QE both never happened and was growth itself (cognitive dissonance at its most delusional) and ignoring entire working sectors, product fields, wealth inequities and inexplicable demand failures. [See my series from last month for more detail)
No consumer market of which I’m aware can prosper in 2017 without access to cheap debt. Since 2008, household debt as a proportion of gross domestic product has grown significantly in 80 countries. Among advanced economies, the median debt ratio rose to 63 percent last year from 52 percent in 2008. Among emerging economies, it increased to 21 percent from 15 percent:
The IMF says that better financial-sector regulations and lower income inequality would help to lower the obvious consequences of this; but like so many Lagardisms, there is no sign at all that it will: 90% of all regulatory intentions since 2008 have been diluted or killed, and wealth inequality in the US is now greater than in ancien régime France.
Loose credit gives the economy a short-term boost, but a 5 percentage-point increase in the ratio of household debt to GDP over a three-year period delivers an average 1.25 percentage-point decline in real growth.
What the IMF chooses not to notice is that, alongside that disturbing near future, the Fed Reserve, the Bank of England and the ECB are at various points along a road of tapering asset purchases and raising rates. They have, if you like, begun to believe their own data. Those actions will increase the level of non-performing loans (in Italy, it could bring on disaster) reduce consumption levels, and fire a hot needle at the house-price bubble.
Without QE, bourse market levels will fall, some credit traders will be in double-trouble, employers tied to public quotation will offload staff, dollar denominated debt in South America is going to look very sick, and the panic snowball will accelerate. Put that alongside a messy Brexit and/or hostilities in Korea, and just one bank failure somewhere important would be more than enough to see us overwhelmed by an avalanche.
The bank failure thing: is it a fantasy? On the contrary, the chances are higher now than they were in 2008. I’ll cover that in a little more detail below, but briefly, let me state my point in writing this piece. It is not to start a Twitter abuse trail between myself and Joni Teves, but instead to point out the laughably obvious: the key driver around the world today is uncertainty.
Uncertainty makes people indecisive. Uncertainty abounds about the effects of Brexit, US neocon foreign policy, Presidential narcissism, Asian militarism, unbelievable data, obviously rigged commodity markets, insane share valuations, optimistic growth forecasts and the twin threats of jihadism via migration. Almost a decade of unfulfilled just-around-the-corner normality predictions have merely added the algae of cynical distrust to a water-wall of doubt building up behind the dam.
Indecisive citizens stay away from big positions. House sales outside the smart metropolitan centres of France are a big fat zero (and EU Forex trading volumes are well down) as Brexit goes round in circles, gold is plodding because fear of paper rigging and bullion storage inflation is rife, while US and EU equity trade volumes are down 10% and 12% respectively because valuations make little sense to the longer term investor.
It seems to me that what too many forecasters are doing is to confuse indecision with calm. Nobody I know, trust and respect is “calm” about the outlook for property prices, stock markets, currency valuations, commodities, interest rates or the banking sector in general. What they are is nervous.
There is plenty of madness around to make them so. If the banking regulations are now robust, why are there still so many dodgy models around?
Take the much-vaunted Metro Bank in the UK. Since its inception in 2010, Metro has lost £200 million; it has never made a profit, and has opened considerably fewer branches than originally intended. It has large liabilities, and while these are outweighed by “assets”, a large chunk of those assets are loans to customers. A serious NPL situation could therefore give them problems – given their debt management costs are high – as indeed could further rate rises by the BoE.
Yet this is what its share price is doing:
The price/earnings ratio stood this morning at 878.23. Even taking into account the potential of a good idea (physical access round the clock and instore formality) that is a ridiculous valuation.
What’s going to happen to oil prices as electric vehicles take more share, and what’s the timescale on all this? The short answer is nobody knows, but Tesla cars has a valuation bigger than that of General Motors, and the Brent/OPEC average price of crude oil this morning is around $62. Neither valuation offers anything trustworthy to support a medium-term position.
But not all those putting off investment decisions are worried purely about potentially precarious economies, wobbly financial models and confrontational neocon geopolitics.
Domestic politics in the West have never been more unstable, extreme and divisive. Despite the insistence of Washington, Beijing, London and Brussels that Planet Earth is growing megaState globalist power-blocs, recent elections, Party shifts and the rapid rise of mavericks suggest a species moving in the opposite direction to that planned out for them by the 3%.
Over the last decade, the Tea Party, UKIP, Syriza, Antifa, Momentum, AfD, Podemos, Five Star, the Front National and En Marche have challenged the so-called Establishment Parties. They in turn have mutual relations based on ideological hatred. The POTUS is really an Independent victor who hijacked the headless Republican Party and gathered the anti-Federal conservative franchise. In the EU, rebellion against “liberal” idealism has flowered in Britain, Holland, France, Italy, Poland, Spain and Hungary. In Britain itself, there is cultural deadlock in Ireland, nationalism in Scotland, and profound resentment of London. In Spain, Catalonian opportunism and dick-size politics from Rajoy have created confusion.
Whatever we might think of these people, today there is Trump, Macron, Farage, Wilders, Le Pen, Grillo, Orban, Strache and Puijdemont where seven years ago there was nobody with political leverage. Only one in nine is an internationalist.
When consumers and professionals looking for certainty find none at all, not only does assertive reassurance about no compelling reason for worry sound like nonsense, it also smacks of that great old phrase “famous last words”. After a certain point, no amount of smug balm carries conviction: that last redoubt of common sense kicks in to produce, if not bears, then certainly people who equate bullishness with at best complacency, and at worst downright irresponsibility.
Poor feedback, lousy intelligence and fake data produce overconfidence. When that turns to meldown, old sailors head for port and hot young heads panic. Joni Teves (left) looks under 30, and she is certainly composed and smart. She has rightly won forecasting awards in the gold sector, and I have personally benefited from her advice.
But narrow expertise in a bonkers world is a dangerous talent. This time, she is wrong.
The Slog 