by Damon de Laszlo, ERC Chairman

Damon de Laszlo

Damon de Laszlo

A trip to the US West Coast last month, and the figures coming through for the second quarter, confirm the feeling that the US economy is on an accelerating trend.

The market setback for the technology companies seems mostly to have been driven by a relatively small amount of selling into a market that is suffering from a lack of so-called ‘market makers’.  These thin and volatile markets are the result of regulatory action to curb the banks’ trading ability, and this has added to the weight of money now being held in the Exchange Traded Funds (ETFs).  There is a dangerous illusion that the ETF market is liquid.  In the case of the large-cap S&P500 ETFs there is some liquidity but as you get into the thousands of ETFs specialising in all sort of esoteric structures, particularly where you have complex derivatives, property and bond holding ETFs, all theoretically instantly tradeable, it is clear that a selling panic could cause havoc across the market.

Aside from this worry that the markets are intrinsically unstable, the economy is growing rapidly, encouraged by the tax reforms and the positive side effects of Trump’s “made in America” speeches.  American industry is investing and mopping up unemployment at all levels.  People who cease to be recorded as unemployed are now re-joining the labour market and those without qualifications are getting jobs.

Interest rate rises from the present level by another one or even two percent are unlikely to create a headwind for this recovery.  It may, however, cause bankruptcies for over-extended individuals and over-geared private equity companies.  On the pessimistic front, we may see inflation starting to rise more rapidly in the latter part of 2019.  The US elections this Autumn/Fall are likely to favour the Trump camp as he will announce that his trade and tariff policies have been successful, already announced vis-a-vis Europe. My bet would be that there will be a meeting with the Chinese, perhaps in October, which will enable him to claim a win for election purposes without anybody really being able to understand what, if anything, really happened!

China, on the other hand, could be more of a worry.  The country’s leadership under Xi has yet to be really tested and the economy for the last five years has been in a sweet spot as a result of the restructuring undertaken by previous Presidents.  The question mark today is, whether these steady innovations and market reforms can continue while the government is grappling with Trump’s economic agenda.  Trump’s policy towards China has some justification in that China has had enormous advantages in its trade relations with the US and, at some point, these advantages have to be whittled away.  It could be hoped that the stability and intellectual capability of the Chinese leadership would be able to adjust their economic policies to accommodate the US.  It does seem, however, that this hope of adjustment is going in the wrong direction.  It has to be asked whether Xi’s apparently unassailable position, as Chairman of Everything, a label that is being more and more applied to him, is indeed a weakness.  The President is a highly intelligent and successful administrator, but he is by background and temperament a Party man and very much a consensus seeker.  The current publicity about the levels of private debt in the Chinese economy, which is growing as the government deals with the bank debt in the public sector, is probably less of a threat than the internal problems being faced by the party machine as it grapples with the enormously enlarged wealthy class that wants the trappings of the middle class, and its difficulties in handling dissent in the outer regions of the North West where Beijing is trying to take control, and therefore responsibility, from the regional governments.  If the Chairman of Everything slips, there is no one else to blame!  It’s a case of so far so good, but the Party machine seems to be moving from a steady innovative economic stance back into trying to control everything and this does not auger well for the nascent market economy.

Moving to the third global economic block, the EU, the democratic deficit and unaddressed economic fault lines become more and more worrying.  The lack of political accountability of the Brussels negotiating team which seems to be intent on derailing every proposal put up by a British government riven by factional fighting.

The concerns of German industry about the potential disruption to complex supply chains still seem to be falling on deaf ears, while the French president is on a private campaign to make the British financial sector’s life as difficult as possible in the hope that Paris can pick up some of the pieces.

In the UK, the ‘Remainers’,  who seem to regard themselves as representatives of the country’s elite, do everything to destabilise the British negotiating position, at the same time as calling for another referendum.  Ignoring Barnier’s statements that Brexit is irreversible and Britain would have to re-apply, the danger that political manoeuvring is going to destabilise the European economy is for the moment generally being ignored.  Government’s role of providing a stable environment for business to thrive seems to be forgotten, even though the economic self-inflicted disasters of countries such as Argentina and Venezuela are constantly in the news.

 

Damon de Laszlo

August 6th, 2018

 

Posted by Aimée Allam