"Central Bank Post-Crisis Quasi-Coordination Has Broken Down"

From Guy Haselmann of ScotiaBank

Out There Beyond the Wall

Germany, France, Japan and the Eurozone are expected to follow Italy with flat or negative Q2 GDP when the data is released this week. Italy’s economy grew at -0.2% in Q2 and has not grown in over 10 years. Japan’s Q2 number tonight is expected to show an annualized decline worse than 7% (maybe <10%). These four countries collectively account for 18% of global GDP. 

In a globalized world with vast inter-connected supply chains, protectionism poses the most dangerous risk to economic growth.  Sanctions against Russia combined with significant counter-measures have spanned and impacted international trade between dozens of countries.  In India, newly-elected Modi’s government doubled the minimum price of exporting onions, and doubled tariffs on imported sugar to buoy the local industry.  Sovereign actions to improve competitiveness are often taken to weaken a countries currency, but imposing tariffs and imposing protectionist laws have similar results but with far quicker and more targeted results.

China’s powerful National Development and Reform Commission has gone after many multi-national foreign firms, hiding behind allegations of anti-monopoly practices (for WTO reasons).  There have been several heavily-publicized raids where Chinese officials have interrogated corporate executives and confiscated computers. Some believe the motivation behind the raids is to incite nationalism to give a boost to less-competitive domestic products.  Some of the firms involved include: Apple, Google, Walmart, Starbucks, McDonalds, Microsoft, Qualcomm, Symantec, and Chrysler.  Executives fear the next step is seizure of property.

The global monetary system is diverging and fraying.  Central bank post-crisis quasi-coordination has broken down.  Initially, foreign central banks unhappily followed the Fed in cutting rates toward zero; or else risked an appreciating currency affecting competitiveness. As domestic challenges developed and the Fed initiated ‘tapering’, many central banks pushed rates back up.  Developed world economies have grown from around 30% of global GDP 20 years ago to 50% today.  This improvement has helped motivate the unfolding of a new international economic order between developed and developing world economies. 

Geo-political tensions seem to inch ever-higher with each passing day.  Protectionist actions are on the rise.  Relationships amongst global trading partners are being altered. Supply chains are being disrupted. Shifting Fed policies are unsettling current imbalances (Note: The Jackson Hole forum begins Aug 21).  Too many investors remain exposed to too many financial securities where, simply put, they are not being adequately compensated for the risk. 

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