2014 It s now or never. Will sunny financial markets thaw a glacial financial system

Transcription

1 2014 It s now or never Will sunny financial markets thaw a glacial financial system

2 A picture (is) worth a thousand words Note: Data in the graph pertains to the US economy and is collected from the original sources via the Macrobond time series application. 2

3 and raises as many questions What do you do to decrease the debt ratio? Why is it that the debt ratio must always rise? How is it that the debt ratio always rise? Note: Data in the graph pertains to the US economy and is collected from the original sources via the Macrobond time series application. 3

4 What do you do to decrease the debt ratio? Given an ongoing deleveraging process Is it really surprising that GDP and CPI surprises..? Note: Data in the graphs pertain to the US economy and is collected from the original sources via the Macrobond time series application. 4

5 Why is it that the debt ratio must rise? Mount Doom Just another bad (hobbit) habit..? Note: Data in the graphs pertain to the US economy and is collected from the original sources via the Macrobond time series application. 5

6 How is it that the debt ratio always rise? The elusive concept of potential GDP (sustainable incomes) Note: Data in the graphs pertain to the US economy and is collected from the original sources via the Macrobond time series application. 6

7 How is it that the debt ratio always rise? The elusive concept of potential GDP (sustainable incomes) Gap: 16%!!! Note: Data in the graphs pertain to the US economy and is collected from the original sources via the Macrobond time series application. 7

8 How is it that the debt ratio always rise? The elusive concept of potential GDP (sustainable incomes) Note: Data in the graphs pertain to the US economy and is collected from the original sources via the Macrobond time series application. 8

9 From dismal to gay where economists never stray The rejection of Malthus dismal Principle of Population arose from the simple observation that not only people, but also innovation, drive growth And innovation is, by defintion, impossible to predict This is the eternal and impossible counter-argument to the pessimism of yours truly and other dismal elements of society but these are clearly exciting times to be alive. Transformation of society has never been swifter or more profound for economical, political and technological reasons Where will it all end? 9

10 The private deleveraging process is finally ending 10

11 2014 It s now or never! An additional consideration in our earlier discussions on long term GDP is that public incomes are a derivative of private incomes. Thus, is public debt any more sustainable than private debt, and is the case for (continued) fiscal stimuli really all that strong? (Hint: your response should have something to do with potential GDP) 11

12 Will low growth produce high inflation? World USA Euroland China Note: GDP compared to trend. Trend is computed as HP-filtered time series 12

13 Tapering an economic acid test The multi million dollar question

14 Working (through) Quantitative Easing Have investment decisions under QE been fundamentally warranted or not? === Large Scale Asset Purchases (LSAP), a.k.a Quantitative Easing (QE) === FED purchases MBS FED purchases Treasuries PD:s (et al) buy MBS anticipating future FED purchases Investors start searching for yield in all forms PD:s (et al) buy Treasuries anticipating future FED purchases Mezzanine debt High yield debt High yield equity EME debt Trade financing === Yield Compression (Financial Repression) === Housing (owning/renting) arbitrage Easier credit P/E rises (HY, defensive) Increased inflows to EME:s Tenants become owners House prices and, hence construction increases Investors become landlords Cost of capital (too) low or expectations on incomes (and demand) (too) high. Misallocation of resources? Asset prices, GDP and employment rise Credit, GDP and inflation rises External deficits increase Emerging Market Economies Bad policies risk making EME-growth dependent on capital flows / credits 14

15 Don t worry, be happy! Hope is all we have

16 Fiat lux Let there be light Our now long-held optimism started to spire back in 2012 [sic!], when we saw the first signs of stabilisation in US housing markets Even though we, at the time, were surprised to see it happen at all, it represents/-ed a stark signal of buyers/sellers and debtors/creditors again reaching agreement on the view of future income streams directly (housing services/utility) or indirectly (debt servicing capacity) related to their dwellings In turn, setting the stage for an eventual stabilisation of household debt ratios and, eventually, also for corporate (long term!) and public sector debt ratios as activity levels would stabilise (the denominator effect) Any remaining concerns were (and still is) if it was all a QE/LSAP-induced dead cat bounce Note: Data in the graphs pertain to the US economy and is collected from the original sources via the Macrobond time series application. 16

17 Et facta est lux! And there was light! QE1 QE2 QE3 QE1 QE2 QE3 A return of the US economy and asset prices was all it took to get the world economy on a roll UK, Emerging markets, Northern Europe foremost our Nordic brethren, all would we benefit from a rekindling US economy Furthermore, if US debtors/creditors are already aligning themselves to raise demand and supply of credits again, the same should hold for at least parts of Euroland, shouldn t it? This is where we are now. And our view is that it will indeed unfold, but perhaps not to the extent sought after in asset markets (equity, credit and peripheral bond markets in particular), implying a risk for volatility and weaker asset prices Any remaining concerns was (and still is) if it was all a QE/LSAP-induced dead cat bounce Note: Data in the graphs pertain to the US economy and is collected from the original sources via the Macrobond time series application. 17

18 Buy, invest, construct and remodel! The jury is still out on whether the economy supports higher interest rates or not. 18

19 Housing fundamentals are a mixed bag! We had a long time with housing completions exceeding household formation in the run up to the crisis Thus, when the crisis struck, there was a lot of inventory, which has only now, after three years with strong household formation, started to normalise reigniting housing construction However demographics often discussed in terms of labour market developments, are however rasing some poignant questions on the longer term outlook for US housing construction 19

20 Nonetheless, steady as she goes is the helm order Note: Data in the graph pertains to the world economy and is collected from the original sources via the Macrobond time series application. 20

21 Meanwhile, in Sweden Hope is all we have

22 Danske forecasts The forecast in a few words A little something for the national accountant GDP is expected to come in above potential (ca 1½% y/y) over the forecast years, implying a narrowing of the output gap Due to i.a. fiscal stimuli and positive wealth effects it is private consumption that does most of the lifting near term. Only gradually, exports will return, net exports remain weak A reorganisation of the Swedish economy including phasing out of obsolete, low value added, capital stock in the exports sectors will eventually require higher investments A still rigid labour market will make it harder for upstarts and only gradually push the unemployment rate lower and keep a lid on inflation Riksbank to remain supportive SEK bn Vol growth in % Private consumption ,6 1,9 2,9 2,2 Government consumption 956 0,3 1,2 0,6 1,0 Fixed gross cap formation 674 3,3-0,7 5,0 6,2 Stocks* -4-1,3-0,3-0,2 0,0 Domestic demand ,6 1,2 2,7 2,7 Exports ,7-1,3 2,7 4,8 Aggregate demand ,3 0,8 2,4 2,7 Imports ,6-2,0 2,8 5,7 Net exports* 206 0,6 0,2 0,1-0,1 GDP ,9 1,0 2,4 2,5 - GDP, Calendar adjusted 1,3 1,0 2,5 2,5 * contribution to GDP growth Trade balance, SEK bn in % of GDP 2,4 2,6 3,1 3,3 Current Account, SEK bn in % of GDP 6,5 6,2 6,4 5,8 Public sector savings, SEK bn in % of GDP -0,1-1,2-1,2-0,9 Public debt ratio, % of GDP* 38,2 39,8 40,0 39,2 Unemployment, % of labour force 8,0 8,0 7,6 7,4 Hourly wages, % y/y 2,8 2,7 2,5 2,9 Consumer prices, % y/y 0,9 0,0 0,5 1,6 House prices, % y/y -1,4 3,5-5,0-4,0 * Maastricht definition Note: Data in the table pertains to the SE economy and is collected from the original sources via the Macrobond time series application. 22

23 Life in a helicopter parented economy Is the services sector in the midst of a fundamental shift? Note: Data in the graph pertains to the SE economy and is collected from the original sources via the Macrobond time series application. 23

24 Life in a helicopter parented economy SEK bn 200 (vol) in deficit reducing measures Note: Data in the graphs pertain to the SE economy and is collected from the original sources via the Macrobond time series application. 24

25 Life in a helicopter parented economy Note: Data in the graphs pertain to the SE economy and is collected from the original sources via the Macrobond time series application. 25

26 Concluding remarks It s now or never

27 Concluding remarks, Sweden We assume a gradual return to growth in our main export markets / segments Short term, monetary policy will remain expansionary implying a relatively weak SEK and relatively low market interest rates Hence, exports growth should also return, which together with low capital costs will necessitate stronger investments And then, finally, consumption should at least be maintained as fiscal policy will need to become less supportive The main risk is a no-go of the foreseen global upturn in demand. Such developments would eventually necessitate/produce contractionary economic policy And, of course, there is always household debt and housing to fret about 27

28 Concluding remarks, global (I) 1. This is the last chance for economic policy in general, and monetary stabilisation policy in particular, to show it can have effect even in a balance sheet recession. If not, we have wasted precious time and resources to the detriment of future generations (bitter? me?) 2. We have decided (?!) a priori that it will work out. However, the low utilisation rates of production factors (Capital and Labour) will keep inflationary pressures at bay for a prolonged period of time i. This implies that interest rates will indeed be low for a long period of time 3. Stronger than expected developments might arise if expectations on future incomes rises again both on behalf of creditors (banks etc) and debtors (HH s, Corporates). Id est, asset prices are more correct than dismal economists such as yours truly. i. Key to this development is mainly credit demand from households and corporates. Reversal of the debt ratio is paramount! 28

29 Concluding remarks, global (II) 4. Should inflation nonehteless arise in the near term, it only goes to show that the crisis was/is structural and that debt ratios can only be controlled via cancelling debt (numerator) or high inflation (denominator). Stabilisation policies have failed. i. Interest rates rise rapidly under steepening and the risk of a bang moment where confidence in economic policy (the currency) is shattered is ubiquitos. Higher rates and steeper curves in conjunction with a weakening currency should set off your alarm bells 5. Either economic policy facilitates an inflationary solution to the debt ratio (probable) and policy rates stay too low in the face of rising inflation premia/market rates 6. Or it refocus on stabilising inflation hiking rates and forcing a massive contraction in the real economy Depression 29

30 Concluding remarks, global (III) Hence, the overarching conclusion is that, no matter how, the end consumer (household) debt ratio must stabilise and start to rise before we can call the great recession finally over. Given the ongoing normalisation of economic policy in exempli gratia the US, 2014 is set to provide not only an acid test of monetary policy but to be the year of reckoning for us all. Godspeed! 30

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