This is a global stock market rout worth celebrating

Cheap oil is a tax cut for consumers, a healthy haircut for sovereign wealth funds, and a shot in the arm for the world economy

By Ambrose Evans-Pritchard

Oil well - nodding donkey

Oil wealth is no longer accumulating in a vast global savings glut, or pushing up asset prices Photo: Alamy
 
 
We toiling workers can allow ourselves a wry smile. For most of the last eight years the owners of wealth and inflated assets have had things their own way, while the real economy has been left behind.

The tables are finally turning. The world may look absolutely ghastly if your metric is the stock market, but it is much the same or slightly better if you are at the coal face.
 
The MSCI index of world equities has fallen almost 20pc since its all-time high in May of 2015, implying a $14 trillion loss of paper wealth. Yet the world economy has carried on at more or less the same anemic pace, and the OECD's global leading indicators show no sign that it is suddenly rolling over now.
 
World growth has been drearily stable for years, shuffling along at 3.4pc in 2012, 3.3pc in 2013, and 3.4pc in 2014, and 3.1pc in 2015. The International Monetary Fund expects 3.4pc this year.
 
The latest "GDPNow" tracker from the Atlanta Federal Reserve suggests that US growth is running at 2.5pc in the first quarter, smack in line with a typical late-cycle expansion in a mature economy.
 
So, at the risk of sticking my neck out a long way, let me suggest that the equity bloodbath this year is little more than noise in the particular set of circumstances facing us.

Students of the 1930s and the Keynesian liquidity trap might even argue that it is positively good for the world economy to the extent that it reflects an erosion of the global savings glut – the ultimate cause of our Long Slump – and entails a shift in spending power back to ordinary people.


The record savings rate is the most important financial chart in the world. This glut is the cause of our troubles


Oil revenues of the OPEC cartel have crashed from a peak of $1.2 trillion to $400bn at today's Brent prices of $31 a barrel, amounting to an $800bn annual transfer to consumers in Europe, China, India, and even the US – still a net beneficiary of cheaper oil. Note that the Texas economy is so diversified that it has largely shrugged off the shale crunch in its own backyard.

This transfer acts as a shot of global stimulus, akin to a tax cut. Saudi Arabia, the Gulf states, Algeria, and Nigeria – as well as non-OPEC producers like Azerbaijan – have not offset this gain to global spending power with commensurate cuts in their own budgets.

They are running down their foreign assets and sovereign wealth funds to put off the pain of austerity, or to "smooth consumption" in the jargon.

Saudi Arabia's net holdings of overseas securities fell by $23bn in the single month of December. Fitch Ratings expects Abu Dhabi to drain its fund (ADIA) by $27bn this year. The Norwegians began dipping into their $820bn fund in October.




A clutch of distressed sellers are having to liquidate stocks, bonds, and property for month after month on a grand scale. This is the exact reversal of what happened during the commodity boom when they siphoned off their surpluses – thereby depriving the world economy of aggregate demand – and pumped up global asset prices.

This is a stock market rout we should celebrate.

The money is rotating out of the markets and into our pockets. Americans have hardly begun to spend their bonanza.

They have let it pile up in bank accounts, pushing up the US household savings rate from 4.5pc to 5.5pc in fifteen months, much to the surprise of the Fed. Sooner or later they will spend it, unless you think America has undergone a Puritan conversion.

This stimulus has been obscured by the immediate and highly concentrated shock from the energy crash. The International Energy Agency says oil and gas companies slashed investment by $140bn last year. This has been painful, but it is a diminishing effect in macro-economic terms.

And no, the oil price slump does not itself send any useful signal about the health of the global economy. The price slide is almost entirely the result of over-supply, greatly compounded by OPEC's political decision to flood the market to flush out rivals, and to slow the onrush of renewables. It is a textbook "positive supply shock", worth 2pc of world GDP.



So let us take a cool view of these deranged markets, unflustered so long as the sell-off does not escalate into a crash, or seriously pollute the credit transmission mechanism of global finance.

The wild card remains the volume of capital flight from China, and what that money is being used for. The People's Bank (PBOC) has run through $300bn of foreign reserves over the last three months. At this pace it is just four months away from the safe floor of $2.8 trillion under the IMF's adequacy metric for a country with a pegged exchange rate.

If the outflows are largely to pay off dollar bank loans and "carry trade" positions – a wise precaution as the Fed drains dollar liquidity – they are harmless and will burn themselves out before long.

The Bank for International Settlements says the dollar liabilities of Chinese companies peaked at $1.1 trillion in late 2014. They fell to $877bn in September – the most recent data – and may be nearer $500bn by now.

The picture is much more dangerous if we are instead dealing with capital flight in tooth and claw, a collapse of confidence in the ruling party itself. Such a dramatic turn of events would overwhelm the PBOC's exchange rate defences and trigger a currency earthquake. I marvel at the cavalier way some analysts shrug off the risk of a drastic devaluation forced upon China by market forces.
The Chinese spent $5 trillion on fixed capital investment last year, as much as North America and Europe combined. There is so much spare capacity in Chinese industry that a 15pc fall in the yuan – as some suggest – would send a deflationary tidal wave across a world already on the cusp of deflation.

We would not then be talking about a global recession; we would be staring straight into the face of a depression.

The overwhelming odds are that no such calamity is about to happen. China is a police state with extreme coercive powers and all kinds of ways to tighten capital controls, openly acknowledged or otherwise.

The Chinese economy is picking up again, a fact that would now be obvious if the authorities had not manipulated their GDP data and put so much lipstick on the pig a year ago.

Proxy indicators such as freight traffic show that the Chinese economy hit a brick wall in the first half of 2015 due to a fiscal and monetary shock. It has been recovering in fits and starts ever since. Fiscal spending rose at a 30pc rate in the final months of last year. Broad credit growth has jumped to 14pc. The money supply is on fire. Borrowing rates are falling.

The Communist authorities are back to their bad old ways of stimulus as usual. This stores up even more trouble for 2017 or beyond, but it unquestionably puts off the day of reckoning for now.

The backdrop to the current worldwide angst has been fifteen months of monetary tightening by the Fed, first by tapering bond purchases and then with the first rate rise in December. The combined effect has in one sense been equal to a full tightening cycle of 325 basis points – or thirteen rate hikes – according to work by the Atlanta Fed.

The shock has been doubly potent in a world more "dollarized" than ever before, with offshore dollar debts up fivefold since 2000 to $9.8 trillion, and with global debt ratios 36 percentage points of GDP higher than before the Lehman Brothers crisis.




Fed chief Janet Yellen took a huge risk raising rates at a time when spreads on US high-yield debt were flashing red, manufacturing was in recession, and US nominal GDP had been trending down for eighteen months.

It was especially risky given that the Fed model appeared to relying on a Phillips Curve concept of the labour market – little changed from the 1970s – when the historical evidence tells us that jobs data are a lagging indicator, and notoriously fickle at an inflexion point.
 
Michael Darda from MKM Partners compares the global effects to Fed tightening in the 1930s under the Gold Standard. It has transmitted a contractionary impulse worldwide, this time informally through dollar hegemony.

The Fed was clearly caught off guard by the effects of its handiwork, just as it was after the Taper Tantrum in 2013, repeatedly failing to adjust its "closed-economy" model to the realities of the modern world.

Mrs Yellen was wise to back off a little in her testimony to Congress on Wednesday, and we can now hope that the worst of this storm has passed.

The ferocious dollar squeeze is at last ebbing. The currency has dropped 4pc since early December on the DXY index, and has even cooled a little against the Brazilian real, the Turkish lira, and other recent casualties. This is the reprieve that half the world has been praying for.

We now have a little wind in our sails. The oil dividend is coming through, and with luck China is over the worst.

So cover your ears and shut out the market noise.

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