Short Note                                                                              12 February 2016

Summing All our Fears     

by Cees Bruggemans          words 680

Global panic infecting key markets is causing growing & spreading disruption, with heavy equity selloffs (into bear market territory), the US 10yr Treasury yield falling to 1.6% and gold reaching $1260 before receding to $1230 reflecting desperate safe haven flight, while the Dollar eases and Euro & Yen gain, as do EM currencies. Where will this end?

Meanwhile, for the second year running, the State of the Nation occasion turned into a political spectacle. More importantly, the SA political message was one of encouraging more “cooperation” with business, but short of changing the policy paradigm in any major way. The Budget will see public perk trimming, and spending curtailment, but not on social spending while there will be no major privatization of existing assets, seeking co-investment only for “new” ventures. But where does that leave the budget shortfall if the deficit has to meaningfully be reduced? The tax hit could be large after all. Where will that be heading?

 

The combined global/local picture offers an unsettling impression: globally, a growth scare is steadily increasing, with loss of confidence in central banks to protect us, with governments unwilling to step in with fiscal policy. Tightening financial conditions may then bring on the reduced growth reality, testing the resolve of central banks ever more robustly.

That could turn into untested territory.

Domestically, the budget configuration (too much emphasis on tax increases rather than asset financings) combined with a lack of convincing change in the long-term policy paradigm may convince markets and rating agencies that we don't get it, that we have not turned the corner back towards a sustainable growth friendly environment that business enterprises can buy into, instead continuing with their accelerated internationalization.

Rating agencies may declare this sufficient reason later this year to downgrade us to junk, as they have done to other countries already. That would cost us yet more, further impoverishing the nation by having to pay more for future foreign borrowings.

Thus it would seem that there are three major parties at present that don't get it.

Global investors are allowing themselves to be governed by their growing fears about disappointing growth and perceived inability of macro policymakers to safeguard us. Is this overdone?

Central banks may not yet fully accept (though dread?) that their chosen policy tools are losing effectiveness, with these risks coming through loudest in bank stocks. Any denial here is going to be stress-tested?

And the SA government apparently feels it can correct the budget deficit and growth prospect, averting junk, without a fundamental shift in policy paradigm realigning it with business paradigms as should ideally prevail in social democratic market systems like ours. This also to be stress-tested by further falloff in GDP growth performance and junk status?

These are seriously worrying tendencies that are turning 2016 into a very challenging environment, in which the American election campaign may see an even bigger business billionaire and previous major of New York (Michael Bloomberg) enter the listings ere long.

A lot of stress-testing ahead: Chinese Yuan decoupling from the Dollar; European refugee streams to be tamed even as another bank crisis looms focused on bond holders (capital raising capacity) and central bank effectiveness; America electing a new President (hopefully a sound one) and the Fed facing stress-tests from markets, too; many commodity producers and EMs pressured by the falloff in Chinese imports and their export prices. A SA government to be stress-tested by its lack of resolve to more fundamentally address its many failures, and the financial consequences following on from them.

Potentially all are runaway challenges.

Keeps currency forecasting a mugs game. Pity we no longer are a major gold producer as of old being able to fully benefit from the global safe haven flight, even if only a temporary, transient phenomenon, as is in the nature of gold booms.

Instead, we have to try our potluck among the many global challenges coming into view at relative short notice. Implications for Rand, inflation and SA interest rates (to be explored in future analyses). With local elections six months down the road. Great timing for somebody.

 

Cees Bruggemans

Bruggemans & Associates, Consulting Economists

 

Website  www.bruggemans.co.za

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Short Profile Dr CW Bruggemans

Chairman, Bruggemans & Associates Consulting Economists

Consulting Economist, Avior Capital Markets

Consulting Economist, Ince (Pty) Ltd

Consulting Economist, Hellmann Logistics (Pty) Ltd

Consulting Economist, Bureau for Economic Research (BER), Stellenbosch

Honorary Professor of Economics, University of Stellenbosch