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20 July 2018

Goldilocks and the Three Bears

With the winds of fortune blowing hot and cold for global markets, Andrew Priestley, Investment Manager, asks if Goldilocks really is awake after all.
 
Summer this year has surprised most of us, with seemingly endless sunshine reminiscent of our childhood days, when the weather was less of a talking point and we dared to dream.
 
However, life’s challenges continue and, in an increasingly complex world, if anything they grow more demanding. To be advised that we are enjoying a ‘Goldilocks economy’ will offend some and be met with indifference by many. In the ten years since the financial meltdown, it has taken protracted policy intervention and fathomless monetary and fiscal stimulus to achieve a semblance of stability. To quote former US Treasury Secretary Larry Summers, the resultant asset inflation has “obscured the full picture... the issue that’s preoccupied monetary policy for the generation before the financial crisis - the avoidance of inflation – is no longer the top issue”. He warns that the dangers of a global economic downturn “dwarf and massively exceed any adverse consequences associated with inflation pushing a bit above 2 per cent”.
 
In short, the risk of an overly aggressive tightening of interest rate policy risks pulling the rug on recovery. Developed nations are ill-equipped to deal with another recession, both politically and economically. The porridge could quickly be icy cold.
 
President Trump’s belligerent approach to any form of negotiation certainly turns up the heat and, in an escalating trade war, it would be foolish to overlook the inherent dangers. The US economic challenge to China coincides with a clear change in China’s attitude to US dominance in the western Pacific, the most important commercial sea routes; hence the elevated tensions in the disputed territories of the South China Sea where China has built massive and impressively equipped military fortresses in defiance of international court rulings. Statesmanship and diplomacy have no place in Trump’s toolbox and, ironically, his authoritarian approach has far more in common with Xi Jinping’s rule for life regime. A protectionist and nationalist America meeting an assertive and nationalist China is a potentially explosive mixture.
 
A further example of Trump’s uncompromising bully-boy tactics is his demand that those who wish to enjoy good trade relations and continuing support from the US should cease all oil imports from Iran by early November, implying a total embargo and blockade on the regime. This is the consequence of his trashing of the nuclear deal earlier this year. The unintended consequence may be a sharp spike upwards in the oil price as the global market faces a supply deficit of 1.5m barrels a day by the fourth quarter. Production from conventional fields is expected to fall by a similar amount next year.
 
Organisation for Economic Cooperation and Development (OECD) inventories are now back below their five-year average. The inflationary impact is glaringly obvious. Just as global economic recovery is gaining traction, reasons to be cheerful appear to be heavily counterbalanced by a range of simmering concerns. These bear points for investor sentiment are just three in a long list of potential disruptors to confidence and complacency. As we enjoy a glorious summer, remember to harvest some of the fruits, lest the approaching winter is harsh.
 
Ends
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Goldilocks and the Three Bears
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