A Yellow Card from Barry
TXNA – Total Nonfarm in Texas – has gone from 10,284 to 11,708, for a gain of 1,424.
John Mauldin, Editor
Outside the Box
The Burning Questions For 2015
1. A Chinese Marshall Plan?
- China’s policy of renminbi
internationalization means that emerging markets are able gradually to
reduce their dependence on the US dollar. As they do, spikes in the value
of the US currency (such as we have seen in 2014) are becoming less
- The slowdown in Chinese oil demand, as well as China’s ability to capitalize on Putin’s difficulties to transform itself from a price-taker to a price-setter, means that the impact of oil and commodities on trade balances is much more contained.
2. Japan: Is Abenomics just a sideshow?
3. Should we worry about capital misallocation in the US?
- Capital spending: Business is expanding, so our entrepreneur borrows to
open a new plant, or hire more people, etc.
- Financial engineering: The entrepreneur or investor borrows in order to purchase an existing cash flow, or stream of income. In this case, our borrower calculates the present value of a given income stream, and if this present value is higher than the cost of the debt required to own it, then the transaction makes sense.
4. Should we care about Europe?
- Will Japan engineer a revival
through its lead in exciting new technologies (robotics, hi-tech help for
the elderly, electric and driverless cars etc...), or will Abenomics prove
to be the last hurrah of a society unable to adjust to the 21st century?
Our research is following these questions closely through our new GK Plus Alpha venture.
- Will China slowly sink under
the weight of the past decade’s malinvestment and the accompanying rise in
debt (the consensus view) or will it successfully establish itself as
Asia’s new hegemon? Our Beijing based research team is very much on top of
these questions, especially Tom Miller, who by next Christmas should have
a book out charting the geopolitical impact of China’s rise.
- Will Indian prime minister
Narendra Modi succeed in plucking the low-hanging fruit so visible in
India, building new infrastructure, deregulating services, cutting
protectionism, etc? If so, will India start to pull its weight in the
global economy and financial markets?
- How will the world deal with a
US economy that may no longer run current account deficits, and may no
longer be keen to finance large armies? Does such a combination not almost
guarantee the success of China’s strategy?
- If the US dollar is entering a
long term structural bull market, who are the winners and losers? The
knee-jerk reaction has been to say ‘emerging markets will be the losers’ (simply because
they were in the past. But the reality is that most emerging markets have
large US dollar reserves and can withstand a strong US currency. Instead,
will the big losers from the US dollar be the commodity producers?
- Have we reached ‘peak demand’
for oil? If so, does this mean that we have years ahead of us in which
markets and investors will have to digest the past five years of capital
misallocation into commodities?
- Talking of capital
misallocation, does the continued trend of share buybacks render our
financial system more fragile (through higher gearing) and so more likely
to crack in the face of exogenous shocks? If it does, one key problem may
be that although we may have made our banks safer through increased
regulations (since banks are not allowed to take risks anymore), we may
well have made our financial markets more volatile (since banks are no
longer allowed to trade their balance sheets to benefit from spikes in
volatility). This much appeared obvious from the behavior of US fixed
income markets in the days following Bill Gross’s departure from PIMCO. In
turn, if banks are not allowed to take risks at volatile times, then
central banks will always be called upon to act, which guarantees more
capital misallocation, share buybacks and further fragilization of the
system (expect more debates along this theme between Charles, and Anatole).
- Will the financial sector be
next to undergo disintermediation by the internet (after advertising and
the media). If so, what will the macro- consequences be? (Hint: not good
for the pound or London property.)
- Is euroland following the Japanese deflationary-bust roadmap?