A Night at the Opera

I know a man who spends most nights in an opera house or recital hall. It strikes me as a bit of an odd pastime which tends to detach you from the hard reality of existence.

But then, opera is life ‘with knobs on’; the phrase I once used as a lad when I had not read enough to have learnt the word ‘surreal’. Markets are like the operatic ‘knobs on’ version of life; one twist and turn of a plot, followed by sharp movements of musically induced emotion. There you are in your seat at the Covent Garden Opera House lulled into near somnolence by a darkness, mediated by sweet melody meaning that all is well – only to be roused suddenly from semi slumber by a startling change of music indicating that things are on the turn for the worse, and that very soon, someone may be throwing themselves from the ramparts of some north Italian castle; or rather what looks like the battlements of a north Italian castle.

One detects an odd note of change in the mood music of equity markets right now. Except, it is changing from the kind that has kept us on the edge of our seats in nervous, melancholy anticipation, to the sort that gets us easing back into the full comfort of our chair in the expectation that good triumphs after all.

Here and there, in the so called ‘real’ world outside opera houses, we have intimations of better things to come, principally from the US. There, the people and the economy appear to be moving quietly back to a condition much desired – economic and financial ‘normality’. Could it even be progress and recovery? Does one hear the early optimistic strains of Wagner’s ‘Siegfried’ as you stroll along Lombard Street?

The USA…

The US economy, to judge from the latest observations emerging from the Federal Reserve, is growing modestly with little inflationary pressure, across most districts of the USA – helpful news from the world’s largest economy! So is the expectation that we shall see a further rise in the Fed Funds Rate this year.

The gloomiest swivel eyed commentators believed that any increase in interest rates would sink the recovery of America’s economy! Nevertheless, we had one last December and the show is still on the road of incremental recovery. The US economy has been recovering slowly for seven years. Now, everyone is waiting for the next upward shift in official interest rates. Most bets are on August for that event, with there being only a one in four chance of it happening this month (the Federal Reserve Open Markets Committee meets on the 14th and 15th of this month) and one in two for July. The favoured plot is that there will be a one quarter of one per cent uplift in rates on average, each six months, so that there will be a ‘normal’ Fed Funds Rate of 4 per cent by 2024.

The problem is that this slowly building trend in US economic recovery is punctuated by those overreactions to monthly statistics – which of course establish the trend by moving above and below it – proving the trend exists rather than disproving it. (The main function of the stock market no longer seems to discount events but to react to them for the benefit of brokers and investment bankers.) Up north there may still be money where there is muck but down south – south of Old Street that is – the money is in instant hysteria!

Meanwhile down under…

A good indicative economy has to be the Australian economy, even if it is less that 2.4 per cent of the world activity. It indicates things about the state of economic affairs in China to which it is a supplier of minerals, oil and agricultural goods. Like the USA it too has undergone a steady but slow recovery. Last month unemployment fell from 5.0 per cent to 4.7 per cent – over a six year period it has fallen from 10 per cent!

Like almost everywhere else, there is little sign of the inflationary dragon. That is, or so it appears, because as in the UK and US there is still much underemployment. People either cannot get the hours work they need or have dropped out of the race because they cannot get a job at all. Yet GDP was up 1.1 per cent last quarter and output increased 3.1 per cent. Moreover, Australia’s trade gap is now the lowest it has been for 14 months. Consequently the Reserve Bank of Australia does not seem to know whether to cut rates or increase them.

On balance, things from the perspective of the long-term trend seem benign, as more hours are worked by individuals even if they are not yet anywhere near high enough to increase consumer demand and wages. Underemployment is estimated to be still 9 per cent in Australia.

And as for the Middle Kingdom…  

The Chinese economy meanwhile, remains as inscrutable as ever. Some have been forecasting its collapse for years – in stark contrast to the logical slowdown we have actually witnessed. It’s amazing how some observers regard 10 per cent growth in Chinese GDP as essential. I simply remind readers that something growing at 10 per cent compound just about doubles in a mere seven years. It has to decline in percentage terms sometime, even if the absolute amount of growth remains enormous! Otherwise you get to an absurd conclusion.

Some cannot adjust from the old export-led model of Chinese economic growth to a newer and more desirable domestic demand-led model. That is why recent evidence of a positive trend in China’s economic activity was cast into doubt by recent poor transport data.

The latest release of China’s international trade data is nonetheless encouraging; it seems to show that China’s trade surplus increased by 9.6 per cent in May, even if market forecasts were higher. Exports may have fallen by 4.1 per cent in May but imports hardly fell at all – evidence, such as it is, that the switch from exporting to domestic demand is actually happening; well, at least in May it did! The Bank of China foresees exports declining 1 per cent this year in contrast to its previous expectation of their increasing 3 per cent. They go on to add (although naturally, many will not take such estimates at face value) that China’s economy will grow near 7 per cent this year despite the estimated fall in exports. It means more employment and commercial opportunities for the West, not less; and that is good news.

Nevertheless, anally retentive debt worriers retain debt as their big cause for concern. To that, I add the following redeeming qualifications: first, the Chinese are still world champions at saving money. It has recently been reported at something like 50 per cent of GDP. That is one of the reasons they do not import enough! Second, China’s government borrowing is largely domestic, not foreign. That makes it less volatile and implies that China has greater room to borrow overseas like other big debtor nations.

Main conclusions…

My main conclusions are of trends in gradual improvement in the world economy from the US to China. Australian economic data seems to support that conclusion, and Europe too seems to be thawing into a bit of growth this year.

In my opinion, the only fear is ‘fear’ itself: fear that Americans could be unwise enough to vote Donald Trump to be the next Commander in Chief and protectionist President and that the UK going Brexit will worry number crunchers excessively. Apart from those two problems I detect a positive note in long-term world growth. As for them, I cannot see the Americans being so daft as to ‘make America great again’ by putting ‘Ronald Mac Donald’ Trump into the Oval Office. Moreover, as a result of its ‘soft power’, the threat to the UK economy seems more apparent than real.