Quick thoughts on recent macro news: China, Brazil, US
Now that I am writing for free again, let me give you a quick update on what I’m thinking about. I still think the removal of China as a marginal buyer of last resort is the macro event that dominates all others. But there are a few additional themes. Let me touch on Brazil briefly.
First, on China, the Chinese first couple is meeting the Obamas in Washington as we speak. I have seen the prepared remarks and noted lots of banter on both sides about peace and cooperation. The undercurrent for this – of course – is that there is tension and a lack of cooperation. That’s why both leaders are speaking to it. Xi was more aggressive though and his text hinted that the US has not been as cooperative in implementing the closer relationship agreed on at Sunnylands in 2013 because of fear of China’s rise. This is why the BRICs bank exists, by the way. And I believe Xi will continue to be more aggressive here.
On the same note here, the US policy toward China has been one of conciliation by and large – no currency manipulator charges, for example. But there is lots of frustration about corporate cyber-espionage and the Chinese show of strength in Asia militarily. There are lots of Republicans who want a sharper response to perceived threats to American hegemony. Hillary Clinton is also relatively more hawkish than Obama. The question now is whether China preempts the change in leadership from Obama with bold action and whether the leadership changes US stance.
Economically, China is slowing. 100%. The latest manufacturing survey data show the worst numbers since March 2009. A lot of this is because it is rebalancing the economy to a consumer-led model. But inherent in that switch is slower growth and also a huge spate of bad debt. How the Chinese handle this remains to be seen. But I believe we are going to see currency weakness and an exporting of deflationary pressures to the rest of the world. And that is going to create more tension with the US, potentially of the ‘currency manipulation’ kind.
Elsewhere, in Brazil, let’s keep in mind the Black Swan of a Petrobras bankruptcy that I still say is possible. Dilma Rousseff could be impeached. As much as Brazil’s problems are home-grown, to a large degree because of a domestic credit bubble, the implosion of commodity markets was indeed a trigger for crisis there. And things have not hit bottom yet.
One last thing, US growth was upgraded recently to 3.9% annualized in Q2. I think this is well above trend. Gross domestic income is lagging that number, and the Atlanta Fed’s GDPNow forecast for Q3 is tracking 1.4% at present. These two data points both suggest the 2%ish growth I have been calling. Increasingly though, numbers are soft and I am actually starting to become concerned about the employment situation. We should look to jobless claims as the best real-time indicator regarding continued health of the US economy. Note that John Boehner’s stepping down as House Speaker is an event that increases the potential for a government shutdown and economic uncertainty. But I don’t see it as something that can have a major impact on the outlook.
That’s it for now. Expect Niels Jensen’s latest monthly piece to appear in the next few days.