Opinion | The world economy moving closer to another hard landing?
4 min read . Updated: 22 Apr 2019, 03:43 PM ISTAccommodative policies have driven unreasonable asset-price booms. A collapse would be painful
During the long Easter weekend, a colleague of mine shared some information about a course that two teachers at the University of Washington have floated. The course is titled, ‘Calling bullshit’. It is about identifying, understanding and dealing with bullshit. The instructors would find rich pickings for their course in financial markets and in macroeconomics data and policies.
Take the valuation of technology-unicorns. According to a recent article (‘The wave of unicorn IPOs reveals Silicon Valley’s groupthink’, 17th April 2019) in ‘The Economist’, 11 out of twelve unicorns lack profits. In general, 84% of the companies going for Initial Public Offering (IPO) lack profits. Ten years ago, the percentage was 33. The current profit-less IPO offerings match the situation in…the year 2000! Yes, we are back there. The operating margin for the median company is -30%. Equity value/Revenue multiples in the double-digits are more common than otherwise.
Ruchir Sharma, in an article (9th April 2019) for the New York Times calls Trump’s obsession with the stock market dangerous. He is quite right that the American President makes policies or changes them with an eye on the stock market. Despite the Federal Reserve abruptly halting its monetary policy normalization, he is worried that he is stuck with the current chairperson. He wants the Federal Reserve to cut rates although the stock market is partying too hard without that. As a candidate, he blamed the Federal Reserve for inflating bubbles!
The stock market boom is nearly ten years old. Yet, Bloomberg website, citing a Bank of America-Merrill Lynch survey, states that allocation to equities jumped 14 percentage points last month. Investors are shorting volatility again, more than what they did back in the summer of 2018. In other words, complacent investors are betting on further complacency. Mistaking Zoom Technologies, a penny stock, for Zoom, the videoconferencing company, investors pushed up the share price of the former by nearly 54000% from $0.005 to $2.70. Nothing more needs to be said.
Next, take China’s macro-economics. Every time it is touted that China pursues macro-economic reforms and is serious about reducing its debt burden, China’s economy stumbles and the government promptly pumps more credit into the economy. Economic growth perks up and investors uniformly praise China’s recovery. Never mind that the actual growth rate for the first quarter at 6.4% (y/y) correctly came in 0.1% higher than the consensus estimate. Retail sales growth in the country has been reported at upwards of 8% y/y in the first four months of the year. Never mind the inconsistency with the decline in the auto sales in the first quarter and the decline in the mobile phone shipment on top of the contraction last year. Allegedly, there was a surge in industrial production growth despite factory shutdowns and, to boot, it was led by sectors that were the most affected by the trade war with the United States – telecoms, machinery and non-metal minerals.
In spite of such debt-driven and yet statistically dubious economic recovery, China is the darling of stock market investors, including global investors. Mary Schapiro, former Chairperson of America’s Securities and Exchange Commission lauds the phased inclusion of China’s yuan-denominated bonds in the Bloomberg Barclays Global Aggregate Index (‘China’s bond market reaches a tipping point’, 17th April 2019) from this month. According to her, “China is acting on the four key aspects that would make it an investible bond market: market regulation, market access, investor demand and improved benchmarks." What should matter to investors are debt sustainability and repayment and default risks. On those fronts, China is backsliding big time, again. In 2018, China’s bond defaults surged to 119 from 35 in 2017 and the amount of defaulted debt trebled. Investors too are apparently ready to invest in yuan-denominated bonds despite debt being the biggest risk factor in China. By standard economic logic, China should have had multiple economic crises by now. The Federal Reserve has repeatedly bailed them out as they have done in 2019 too.
Thus, monetary policymaking of recent decades (and weeks) makes the strongest claim to ‘bullshit’. It has contributed to social unrest, to rising income and wealth inequality and to the rise of authoritarian nationalism in countries around the world by creating real wealth effects but phantom economic recoveries. The latter has contributed to global warming with unsustainable construction booms. The recovery in the price of Bitcoin in recent weeks is the most recent indictment of the U-turn in the Federal Reserve monetary policy towards accommodation. In a recent interview in Switzerland, Jim Grant of eponymous ‘Interest Rate Observer’ opined that Federal Reserve monetary policies post-2008 have been nothing short of criminal. That is no ‘bullshit’ of course.
Given that the current asset price boom cycle is already longer than the 2001-07 cycle, the final denouement too will necessarily be worse than the fallout of the 2008 crisis. Therein lies the hope to the end of the ‘bullshit’ that has characterised policymaking and much investment activity in recent times.
V. Anantha Nageswaran is the dean of IFMR Graduate School of Business (KREA University). These are his personal views.