BlackSummit Financial Group, Inc. proudly introduces The Monthly Barometer.
The Barometer is written by Thierry Malleret, a professional with whom we collaborate with. Thierry brings a uniquely insightful perspective to global economics and geo-politics. We have found his writings to be mind-stimulating, full of wisdom, perception, and characterized by intellectual honesty.
Thierry is a former top executive for the World Economic Forum (WEF) that organizes the Davos Conference. He has also served as Chief Economist and Strategist for Alfa Bank managing a team of experts for capital markets in Russia, Ukraine, and Kazakhstan. Thierry has also served with the European Bank for Reconstruction and Development (EBRD), was a resident fellow with the Institute of East-West Security Studies, and was assigned to the Office of the Prime Minister of France between 1988-’90. Thierry has a doctoral degree in economics from Oxford University.
We will be sharing his publication with you for the next few months free of charge. If you wish to continue receiving The Monthly Barometer after that, we ask that you subscribe directly at the following link:
We hope that you enjoy his publication over the next few months.
- The excited buzz about a synchronized global recovery that made the headlines just a few weeks ago has quickly subsided. Devoid of hyperbole and put in the simplest possible terms, the current situation is as follows: the most advanced economies have slightly higher growth expectations (from a very low base), but a slightly bigger disinflation / deflation problem. Emerging markets (EMs) have, on the whole, the opposite problem: slightly lower growth expectations, but higher inflation.
- Some readers question why the Barometer is structurally “bearish”. The reason is straightforward: global demand (which equals consumption + investment) is destined to remain weak in the foreseeable future because entrenched global mega- trends (ageing and rising inequalities in particular) render inevitable an increase in global savings. This, in turn, reduces global consumption. The only possibility to compensate weak global demand would be to expand debt: a non-starter, either in developed markets or emerging ones, as debt-fuelled consumption binges have run their course.
- The financial markets are confused about the outlook because of their exclusive focus on what can be measured (and therefore priced, and traded). This can only take us so far and no further because most of what really matters (social unrest in Thailand, Ukraine’s possible implosion, the ever more frequent recurrence of extreme weather events, and all kinds of other adverse shocks such as the sacking of the much respected governor of the central bank of Nigeria) are by nature occurrences to which we can’t assign a probability.
- The digital economy, with its marginal costs close to nil, exacerbates this “measurement” problem. We might underestimate its effect on economic welfare, by under-appreciating the “digital consumer surplus” (the difference between the price and value to consumers) or by failing to account for some investment in intangible assets. We might also underestimate its adverse socio-economic impact on rising inequalities, growing long-term unemployment, and so on. No surprise confusion reigns supreme!
- Facebook’s acquisition of WhatsApp – a text messaging start-up – for up to $19bn epitomizes some of the issues mentioned above. Facebook agreed to pay a price equivalent to $345m per WhatsApp employee (55 in total!), for a service that charges its 450 million users $1 a year (after the first year free). Over the next 4 years, it is estimated that free messaging will wipe out more than $20bn from fees collected by mobile operators on SMS ($120bn last year). This is nothing compared to what’s coming next: WhatsApp just announced it’s about to offer free voice calls. Hundreds of billions of revenues will be then lost by mobile operators (up to $400bn a year by some estimates). Talk about disruptive innovations!
- A crisis that is brewing slowly but surely is student- debt in the US and the UK. In America, student loans now amount to more than $1tr. (1/10 of total household debt). The default rate has climbed to 12% as the percentage of loans made to bad credit scorers rose. In a world where the cost of higher education is soaring, but in which a degree doesn’t make you necessarily better off, this is a major cause for concern. Contrary to a sub-prime mortgage, a sub-prime student cannot be written-off: both the borrower and the lender are stuck…
- Although Portugal is by no means out of the woods, its sweeping structural reforms are starting to pay off. Not only has it improved export competitiveness – in numbers (24.2% export growth over the past four years) and in quality (moving up the value chain), but also unemployment has come down significantly. We’ve been arguing since the onset of the Eurozone crisis (at the end of 2009) that its countries have the potential to emerge from the current mess much stronger. Portugal is proof of this.
- There is a lot of excitement about the UK recovery, but the country’s current success is grounded in the very same logic that caused the bust in the first place: over- leverage fuelling a real-estate frenzy. As Adair Turner (former chairman of the UK Financial Services Authority) recently remarked, it is doubtful that such a strategy can succeed in delivering sustainable and balanced growth. Private debt addiction always ends in tears, especially so when its main purpose consists in purchasing for the most part existing real estate.
- Japan’s nationalistic policies and angst are inversely correlated with its economic achievements: one goes up when the other goes down. This is not serendipitous. The economic data is downbeat, while structural reforms – the “third arrow” – are not making much progress. In such circumstances, rising nationalism constitutes an easy escape valve.
- Worry about EMs is no less valid just because it is now entrenched as the consensus trade! The countries with the greatest downside risks are those exposed to: (1) strong credit growth / credit excess (such as China), (2) large current-account deficits (Such as Brazil or South Africa), (3) significant exposure to China (such as Peru or Chile).
- Kazakhstan’s unexpected decision to devalue the tenge by almost 20% is a reminder of the substantial currency risk that exists for those invested in EMs. It was precipitated by the plunge of the Russian rouble and follows the devaluation of the Argentinian peso last month. The risk of EM competitive devaluations could become systemic – about $700bn were borrowed by the non-bank EM corporate sector between 2010 and the middle of last year.
- The recent Swiss referendum – in which 50.3% of voters backed an initiative destined to curb immigration – is a harbinger of things to come. The largest fault line emerging in a majority of rich countries is the degree to which they should be opened to the rest of the world or not. The trend is clearly against immigration, multiculturalism and the different “ills” associated with globalization. In Europe, right-wing populist parties rarely garner more than 30% of the votes in an election, but they are nonetheless in a position to shape the political agenda, fuelling extremism and xenophobia.
- Irrespective of whether one “likes” the US or not, its progressive international disengagement (the equivalent of a “geopolitical taper”, as the historian Niall Fergusson puts it) will increase international insecurity. More and more, countries that tended to rely on global public goods provided by the US “benign hegemon” (for sea lane security, the fight against international terrorism, etc.) will now have to tend their own backyards themselves.