"Where are we in the business cycle?" is a question macroeconomists often are asked by investors. On the face of it, it is a reasonable question. The macroeconomic backdrop is an important input variable for key asset allocation decisions such as whether to be over- or underweight stocks relative to bonds, sector rotation, not to mention FX and credit positions. The question invites the idea that economic expansions are on the clock. They are in the sense that their average length is a question of a relatively simple empirical exercise. But a classic truism still remains. "Economic expansions don't die of old age, they're killed by economic policy", a phrase I have adapted from the U.S. version ending with the idea that economic expansions usually are killed by the Fed.
Read MoreThe flow of goods and capital across borders and between nations has featured in human storytelling and economic relations since the beginning of time. The biblical protagonists traveled and traded with each other, and often fought over the dominion of resources. The protagonists in modern historical tales of trade and war since the turn of the millennium continue the habit in similar ways. You would be hard-pressed to find a better historical account of that than in Ronald Findlay and Kevin H. O’Rourke’s Power and Plenty. The book is as much about the wars that divided empires and nations as it is about the exchange of goods and capital that bound them together, though it is reasonable to say that these two perspectives are joined at the hip. Economics plays a specific role in the study of global trade and empire-building. The exchange of goods, capital, and services across borders gives rise to transactions as the ownership of resources shifts. Over time, these processes lead to the accumulation of wealth and debt on the part of nations and economic actors—assets and liabilities, in the jargon of modern finance. It is the economist’s job to trace, identify, and record the nature and value of these transactions.
Read MoreAfter two weeks on the road seeing investors, I am convinced that portfolio managers are becoming increasingly sceptical about the synchronized global recovery. That’s probably a good shout. I recently surveyed global leading indicators, and didn’t like what I was seeing. The data since have been worse. My in-house diffusion index of global leading indices has been flat since the start of the year. Its message is simple, global manufacturing accelerated sharply for most of last year, but momentum petered out in Q1. It doesn’t yet point to an outright slowdown, though other short-leading indices, such as the PMIs, do. The signal is more uniformly downbeat for the global economy if we look at liquidity indicators. Inflation is rising, with oil prices at a 12-month high, and nominal M1 growth is decelerating. Historically, this has been one of the more reliable omens for slowing growth in the global economy. Of course, investors don’t have to peruse economic data to tell them that something is afoot. Let me see whether I can remember everything. We have had wobbles in emerging markets, the return of political risk and higher bond yields, and even euro-exit chatter, in the Eurozone periphery as well as the morbid fascination that Deutsche Bank is going to blow a hole in the European, and perhaps even in the global economy.
Read MoreMarkets were mulling familiar themes last week. Will a wider U.S. twin deficit change the rules for the dollar and treasuries and is elevated volatility here to stay in equities? Judging by last week, the answer would be: probably and yes. The contemplation over these stories, though, were interrupted by politics. Mr. Trump announced his intention to apply tariffs on steel and aluminium—25% and 10% respectively—and Mrs. May attempted to give clarity on the U.K. government’s Brexit position.* I was unimpressed with both. Before I have a dig at Mr. Trump, I ought to provide an example of someone who supports it. I have great respect for Stephen Jen, but his argument here is like endorsing the idea of a diet by advising someone to eat nothing but kale and carrots for a decade. The analysis of Mr. Trump’s tariffs requires a distinction between the principle and the concrete measures. I concede that China is bending the rules of global trade, but Mr. Trump is stretching the fabrics of macroeconomic policy if he starts imposing tariffs on industrial goods. He is presiding over an economy close to full employment, a low domestic savings rate, and a medium-sized twin deficit. To boot, he is about to let fly with unprecedented fiscal stimulus.
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