Things could have been a whole lot worse, thinking October 1929, 1987, 2008. But they are not. We aren’t on the brink of 85% market crashes, and the onset of Great Depressions, Great Recessions & more such great stuff. Instead, we are being mildly worked over, tossed like a good salad. And better things loom, given time? So the world isn’t stuffed, merely working off some bad indigestion, if intimidating in places.
Stock markets like Wall Street, those in Europe and most of Asia ex-China, and including the JSE All Share in Johannesburg, are within 5% of their all-time highs, even if with considerable shifts in composition, and may have experienced 5%-15% trading ranges this storm season that started with Chinese panic, richly leavened with Fed hysterics, having barely finished digesting Greek antics & Russian flaunting.
It has been a busy year.
The Chinese growth adjustment continues to be overrated in the short term, not fully acknowledging the strength and support of its consumer story, while a bit of hesitancy in US data this in recent months is being over-interpreted. It is Japanese & European structural weakness that looks underrated, but being given the benefit of the doubt?
The deep hits among commodity producers & EM manufacturing hubs, all victims of the Chinese structural adjustment in full cry (with recessions in Brazil, Russia, Canada, Taiwan, Singapore & Japan) are given short shift, so much road kill in an unruly season. Casualties are to be expected when the Big Huns shift position & their policies.
The 10yr US Treasury bond yield has again dropped below 2% overnight, an excellent weather vane, as much of slow steady growth recuperation, absent inflation pressure as Fed ability to temper market expectations. Instead of fear about what comes next, there lingers a continuing safe haven condition.
The Dollar remains strong, if tempered by mild seasonal data & autumn storms suggesting a yet delayed Fed. The Euro meanwhile isn’t as weak as supposed. It could easily have gone below parity against the Dollar this year, but didn’t. Instead, it is parked comfortably well above 1.10:$, reflecting as much that America hasn’t gone for the kill, as the ECB also adroitly managing to navigate many pressing issues, and like America experiencing energy-compressed inflation & very mild growth.
Commodity Dollar prices have now halved since their 2011 peaks, with some (iron ore) down by 70% & others (precious metals) down by nearer 40%. The world is back in surplus, and unlikely to shortly see renewed resource shortages or fearful crises powering commodity prices higher. We may be close to the commodity cycle bottom, but then again global indigestions like the present one take time to play out, with always an element of price undershooting to the downside, like overshooting topside.
But there likely will be an end to this slide these next two years, and in the next decade prices will drift higher anew, with recessed commodity producers coming up for air.
If the global resource base isn’t going to be pressured shortly, with labour, physical capital & commodities in ample supply, global trading unimpaired, and technological renewal racing onwards, destroying & disrupting any cosy niches that may have survived so far, the likelihood of inflation reviving much, if at all, may be very small.
Currency volatility may cause inflation spiking in places (while commodity price compression is causing deflationary down drafts), but the idea that inflation will shortly coming roaring back is a misplaced one. Instead, placidness prevails, with price-makers converted into price-takers nearly everywhere.
This dormancy could continue for some while, the corollary of the Great Growth Moderation, itself a function of only slow post-crisis recuperation in the West, structural adjustment in the Asian East, and consequent recession in too many places in between, having to adjust to both.
It is a wonder that financial asset markets haven’t adjusted more than they have. But then central bank liquidity remains ample & continuous, very vigilantly on station and supportive in surprising ways (considering what went wrong in the 1930s, but then that helped to concentrate minds today).
Of course, 2% bond yields are generous if long-term inflation has been compressed as much as it has been (in contrast to a policy goal of 2%), and the global liquidity condition keeps underwriting equity values, even when growth is slow. Currencies could have made yet bigger adjustments, but then the global makeover & policy response is a moderate one, not a hasty affair.
Give it time. This storm season will blow over, they always do, after which spells of better growth weather may be expected when policy normalization can proceed gradually. The world has a way of getting on with things, even if civil wars rage in places, and the wrong people rule in others.
Time will take care of that, too, as so many other things. The one constant.