Newell Palmer: Monthly Economic Notes – August 2019
Is secular stagnation a possibility in the coming years? It is about a persistent downturn that does not respond to easy money. In 2013, the former US Treasury Secretary Larry Summers speculated that the real interest rate at which savers and borrowers would agree to exchange funds may have been falling for decades and even turned negative. This complicated the task of central banks, who could not push interest rates too far below zero without destroying banks’ profitability and fanning asset bubbles. However, without meaningful inflation, real rates under secular stagnation would, even with zero or slightly negative nominal rates, stay higher than what borrowers could afford, stifling productive investment. Without aggressive fiscal policy, the economy could remain stuck in a low-rate, slow-growth rut.Monthly-Notes-August-2019.pdf
Newell Palmer: Monthly Economic Notes – July 2019
The consensus is that we are currently in a late cycle environment with risks elevated, but also with the potential for markets to further rally. The risks include the inverted yield curve signalling a potential recession in the next two years, trade war uncertainty and weakness in global growth. However, with major central banks across the world currently easing, more China stimulus and the potential of a US-China trade deal, these factors could trigger a rally in markets. There is a risk of a “melt-up”, i.e. strong rally, in equity markets as central banks continue to reduce interest rates. But the economic background is weakening with lower growth. Thus, caution is warranted at this stage of the cycle, but to recognise that growth assets can continue to perform in the short term.Monthly-Notes-July-2019.pdf
Newell Palmer: Monthly Economic Notes – June 2019
Trade wars, whether between US and China or US and Mexico, can be unsettling to markets. However, taking a step back, the fundamentals are still positive with good economic growth in the US and China, and low unemployment in the US. The current economic expansion is the longest since the second world war, but economic cycles do not end because of old age. The two factors to watch that may indicate an end of the economic cycle are a period of synchronised monetary tightening and a major misallocation of capital, but these signals are not flashing amber. Previous cycles ended in 2008 and 2000 with a synchronous tightening of monetary policy by major central banks. At this time, there is no synchronous monetary tightening and some central banks are either loosening policy or indicating that they may loosen policy. Whilst there is increasing leverage in the US corporate sector and Chinese State-Owned Enterprises, these levels are not as high as previous cycles.