• The global economy seems to be afflicted by a sort of languor. The bottom line is this: extraordinarily aggressive monetary policies have failed to deliver robust and sustainable economic growth. Japan and the Eurozone are stuck in the mire, and although in the US and the UK growth is more robust, it is imbalanced and unsustainable (in the case of the UK). Emerging markets (EMs) have ceased to surprise on the upside. Several of them now represent a source of potential disruption for global growth and stability.
• Household consumption represents a predominant part of GDP (up to 70% in the US), which explains why the current situation of chronic deficient demand is acting as a brake on GDP growth. In most high- income countries, domestic demand is well below the level at which it should be. In the US, it’s 6% higher than before the crisis – the best performance, but very feeble by historical standards. In Japan and in the UK, it’s 2% higher. In the Eurozone, it remains 4% below the pre-crisis level. This state of deficient demand can only persist as it is largely due to structural factors: chiefly demographics, but also inequalities and stagnant or declining real wages.
• Economics is all about psychology: (1) expectations about the future, and (2) shifting preferences (not stable as standard economic theory assumes). Failure to take this into account is why central banks and international organizations so often get their economic forecasts wrong. Discussions about the deflationary risk are a case in point. They are technical in nature, and fail to capture the “mood”. In the Eurozone, Japan, and among the US middle-class, the mind-set has become deflationary: many people have lost confidence in the future and this risks entailing a self-fulfilling effect. Furthermore, the millennials and the generation that follows have broken with their parents’ addiction to debt and are much less interested in consuming “stuff”.
• Today’s world is plagued by conflicting signals. But a somewhat messy world with a future marked by ever-increasing uncertainty is not un-investible one! Over the next few years many themes will continue to do well irrespective of how the outlook evolves as they are driven by global mega-trends whose likelihood of occurrence is 100%. Ageing, EM consumption, agribusiness, water, wellness and so on: all have staying power. Those who can deploy capital fast will benefit the most.
• Only three policies can prevent the Eurozone from falling into prolonged stagnation and “lowflation”: (1) structural reforms, (2) public-sector investment (particularly in Germany) and (3) debt restructuring. The first will take a while to pay off while the latter, albeit inevitable, still remains taboo – it was even omitted in the recent ECB stress tests! Unless growth resumes fast, which is unlikely, the likelihood of debt restructuring in the periphery of the Eurozone is close to 100%.
• Japan just entered recession-with Q3 GDP contracting by 1.6% Y-o-Y, and its core inflation fell below 1%. GDP growth and inflation performance cast serious doubts about Abenomics. The Bank of Japan is now acting as “the Ministry of Finance’s ATM” (in the words of a commentator), but is not gaining much traction in its effort to bring deflation to an end. As in the Eurozone, monetary policy succeeded in saving the system from collapse, but it cannot produce economic growth unless it is accompanied by structural reforms. PM Abe’s efforts to implement his “third arrow” – the structural reforms – are now endangered by the elections due on December 14th.

• All too often, the predictions we make are based on a “like-the-past” fallacy: we assume, erroneously, that what worked somewhere in the past will work in the future. A weighty example is the widespread assertion that India will now replace China as the new manufacturing powerhouse of the world. As PM Modi’s chief economic adviser (Arvind Subramanian – a much respected academic) himself recognizes, this won’t happen: India will not become the next China. The world has changed and premature deindustrialization is happening worldwide. Too late…
• In the same vein, the expression “based on current growth trend” is overused by investors, but devoid of meaning when applied to non-linear adaptive systems. In reality, current growth has no predictive power. In a recent paper, two US economists (Pritchett and Summers) claim that growth always reverses to the mean. If true, this provides another reason why China won’t buck the trend of super-fast growth for much longer, and why EMs won’t converge as fast as we think.
• In the new digital economy, flexibility trumps security. This, in turn, explains (1) why real wages are unlikely to rise and (2) why consumer demand will remain subdued. A new app – Wonolo – originally developed for Coca-Cola, provides part-time employment with little protection and few benefits. At the click of a mouse job seekers find a job listed on the online platform and report to work just a few hours later. The “Uber-economy” is now spreading to big business.
• China’s announcement that next spring it will run a joint military exercise in the Mediterranean with the Russian navy has symbolic value. It shows that: (1) we have truly entered a multi-polar world; (2) the race in terms of spheres of influence is now on. Competition between the established power – the US and its allies – and the rising ones is therefore inevitable (but conflict is not!). The so-called “Thucydides’ trap” – the structural stress that inevitably occurs when a rising power rivals a ruling power – will be a source of global disorder / uncertainty for years to come.
• In the realm of geopolitics and from an investor’s perspective, Russia is now a much greater uncertainty than the Middle East (which is predictably bad). When considering what might happen in conflict or troubled zones like Ukraine or the east and south China Seas, it’s important to realize that their potential for instability is inversely correlated with the economic situation of Russia and China (if the latter goes down, the former goes up). The greater the economic crisis, the greater the likelihood that the authorities will resort to the escape valve of nationalism and belligerence.
• Over the next month(s),the major “must-watch” issues are: (1) growth deceleration in China; (2) deflationary pressures in the Eurozone; (3) Currencies’ shifts – falling commodity prices; (4) $ risk in EM corporate debt; (5) geo-political turmoil; (6) Japanese elections. For real-time analysis on any of these, or if you are interested in prediction markets to better forecast some of the risks, please contact us.

For real-time analysis on any of these, or for insights on how some private investors in our community of subscribers “play” these themes, please contact us.