Archive for June, 2016

The Global Economic Doctor

June 13, 2016

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The Global Economic Doctor– Click link to read the full edition.



Welcome to the latest edition of The Global Economic Doctor.  This week, Dr. Scott B. MacDonald writes:

Waiting on the Wall of Worry
History is a race between education and catastrophe.
— H.G. Wells


The global economic recovery has been fragile and growth-anemic compared to past cycles. In early June, the World Bank released its Global Economic Prospects, which commences with the following: “Growth prospects have weakened throughout the world economy.” Indeed, the World Bank has taken global economic growth down to 2.4% from the 2.9% it had forecast in January. Pain is most acute in emerging markets, which “are facing stronger headwinds, including weaker growth among advanced economies and persistently low commodity prices, as well as lackluster global trade and capital flows.”  While the World Bank report gave voice to the worries of many investors and policymakers, sentiment in the markets has decidedly turned bearish through the past week.  Equity markets continue to bleed capital, while investors continue to move into cash ($1.8 trillion in institutional money market funds as of May 30th) and higher-rated sovereign bonds. A number of central banks have moved their benchmark interest rates below zero, with strong investor appetite for the perceived safety of higher rated sovereign bonds (Germany, Switzerland and Japan) pushing the yield of more than $10 trillion of sovereign debt into negative territory.  One of the more vocal critics of this has been Janus Capital’s Bill Gross, who tweeted, “Global yields lowest in 500 years of recorded history…this is a supernova that will explode one day.”  According to Goldman Sachs, an unexpected 1 percentage point rise in US Treasury yields could cost investors an estimated $1 trillion.  To grossly understate, perhaps negative interest rates are not such a good idea and the next major market move could come when European central banks and Japan opt to end that policy. Do investors face a wall of worry as June progresses, with the upcoming FOMC meeting, the BREXIT vote, and ongoing China jitters? Absolutely!  The famous British writer H.G. Wells, who gave us The War of the Worlds and The Time Machine, is right in saying, “History is a race between education and catastrophe.”  I am hoping education wins out.


The Global Economic Doctor

June 6, 2016

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The Week Ahead

June 6, 2016

Summary: Will the Fed raise rates in June or July?  Will the US central bank wait until December?  Our view has been and continues to be December.  The reasoning behind that is straightforward – a potentially volatile mix of political risk factors and mixed US economic data. The former pertains to Brexit, Spanish elections and US elections, to name but a few. The latter looks to US data that is likely to reflect an economy likely to continue to grow, but with a certain degree of fragility that perpetuates the fear that recession lurks around the next quarter.  The string of relatively solid economic data came to a halt last week with a worse-than-expected non-farm payrolls number (38,000). It appears that June is now off the menu, with July the new favorite.  We are still sticking to December as we see an ongoing lumpiness in data and wariness over geopolitical events. Janet Yellen’s June 6th talk at the Philadelphia World Affairs meeting did not change our mind — if anything it confirmed our views of her more dovish bias. This leaves investors groping through markets, willing to assume some risk, but constantly watching for the next black swan, which explains why some $1.79 trillion sits in institutional money funds.

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The week ahead will focus two major items — primaries are held in California, New Jersey, New Mexico, and South Dakota and the European Central Bank President Mario Draghi addresses the Brussels Economic Forum.  Also on the agenda — India’s Prime Minister Narendra Modi is visiting President Barack Obama.

US Politics: While the primaries serve to confirm Donald Trump’s candidacy on the Republican side, they have greater significance for the Democrats.  Hillary Clinton is expected to clinch the Democratic Party nomination (with super delegate votes counted) this week.  However, a win by Bernie Sanders in California, where he has gained ground in recent polls, would end the primary season on a sour note for Clinton.

Although Clinton is calling for Sanders to end his campaign and move on to uniting the party, he insists that the Democrats will have a “contested convention” in July in Philadelphia. Sanders has stated that he will spend the time between the end of the primaries and the July convention seeking to sway super delegates to shift their support to him. Indeed, Sanders recently stated, “I have heard that Secretary Clinton has said that it’s all going to be over on Tuesday night. I have heard reports that the media, after the New Jersey results come in, are going to declare that it is all over. That simply is not accurate.”  This is no doubt music to Trump’s ears.  Historically the more contested a convention is, the less chance a candidate has of winning the general election.  Although there is not a love fest on the Republican side, Trump has clinched the nomination with the needed number of delegates.

Looming over the electoral landscape is the possibility that Clinton could be indicted over the State Department email scandal. If this happens prior to the July 25th-28th convention it could leave the Democrats with a major problem: their presumptive candidate facing an indictment, much of the establishment opposed to Bernie Sanders, and the super delegates probably up for grabs.  All of this contributes to making the 2016 presidential campaign one of the most abnormal campaigns ever.

Shifting Geopolitical Landscape?: Europe continues to struggle with a mix of slow economic growth, high structural unemployment (10.2% in April in the euro-zone according to Eurostat), onerous public sector debt burdens (Greece, Portugal, Belgium, Spain and Ireland), and problematic banking sectors in a number of countries (Italy is real worry).  Add to this geopolitical worries — the UK referendum, Spanish elections, restless Catalans, ongoing pressure from migration, strained relations with Turkey, and questions as to whether or not to loosen sanctions against Russia. Consequently, when Mario Draghi speaks, as he will in on June 9th, people will listen.  Euro-zone growth has been raised for 2016, from 1.5% to 1.6%, with 1.7% forecast for 2017 and 2018.  It is expected that Draghi will maintain that outlook. On a geopolitical note, Q1 2016 real GDP growth was 0.5%, driven by domestic growth and balanced by weak export growth.  The last has implications as a growing number of European Union members, including Hungary, Greece, France and Italy, have seen their exports to Russia plummet and this hurts.  At the end of May, Sigmar Gabriel, Germany’s Economics Minister speaking at a conference in Rostock, stated in regard to relations with Russia, “Isolation is not at all helpful.”  He also stated that Russia has recently demonstrated it can be a reliable partner and mentioned the nuclear deal with Iran as an example.  The EU is scheduled to meet at the end of June to renew sanctions against Russia over Ukraine and Crimea. This may not be as straightforward as expected.

From June 6th to 8th, Prime Minister Modi will be in Washington meeting with President Obama.  During the visit, the Indian leader will address a joint meeting of the US Congress.  The significance of the visit is around the growing economic and security relationship between the US and India.  Under discussion is the upgrading of the Indian Navy, joint military exercises, and reducing some trade restrictions.  India is important from the perspective of US and Indian strategic concerns over China.   Considering the rise of tensions in the South China Sea and China’s efforts to improve its transportation network in Tibet (which worries New Delhi), the Modi-Obama meeting underscores the significance of US-Indian relations with an eye to diplomatic and military cooperation.

Brexit Polls: The leave the EU campaign has regained momentum and is ahead slightly 43% to 40% (remain) in the latest Observer/Opinion poll.  According to The Guardian, the poll suggests the remain camp has lost four percentage points in the last two weeks, during which Boris Johnson, former mayor of London and Michael Gove (former Tory Justice minister) have relentlessly campaigned on the theme of immigration. Half of the 2,007 people surveyed said they believed immigration would be under better control if the UK did leave the EU.  Johnson is expected to launch a campaign to highlight the security danger of EU membership, including the possibility of Turkey’s accession to the EU.  Although we think the vote will swing back to remain in the EU, the possibility of an exit cannot be easily ruled out. In fact, concerns of that happening have weakened the value of the UK pound and put a dark cloud over UK equities.  Between here and the referendum expect Brexit phobia to increasingly factor into European markets — It will certainly be a factor in the US central bank’s FOMC meeting next week.

Dr. Scott B. MacDonald

Chief Economist

MacDonald Scott b

      Dr. Scott B. MacDonald is Chief Economist at Smith’s Research & Gradings.
      Prior to this, he was Senior Managing Director and Chief Economist at KWR International, Inc (KWR). Prior to KWR he was the Head of Research for MC Asset Management LLC, an asset management unit of Mitsubishi Corporation based in Stamford, Connecticut (2012-2015) and Head of Credit & Economics Research at Aladdin Capital (2000-2011) and Chief Economist for KWR International (1999-2000). Prior to those positions he worked at Donaldson, Lufkin & Jenrette, Credit Suisse and the Office of the Comptroller of the Currency (in Washington, D.C.). During his time on Wall Street, he was ranked by Institutional Investor magazine as one of the top sovereign analysts.
      He did his Ph.D. in Political Science at the University of Connecticut, Masters in Asian Studies at the University of London’s School of Oriental and African Studies, and BA in History (Honors) and Political Science at Trinity College (Hartford). He has written 18 books and numerous articles. Areas of expertise are macroeconomics, international finance and geopolitical risk.