Markets were relatively steady overnight. Dow up a little. Oil off a touch. Gold is up a few dollars. And the Aussie dollar has fallen back from its recent US78.3 cent high.
Markets are calm in the lead up to Fed meeting that’s due to kick off on Wednesday, 27 April, Washington DC local time.
The Fed will sprinkle some more pixie dust on markets to ensure hope continues to prevail over fundamentals. There will be no rate hike.
The other central bank meeting this week is on Thursday, 28 April, when the boys at the Bank of Japan get together. Who knows what the economic equivalent of Fawlty Towers will come up with next? Will they take rates even further into the negative? Double down on their money printing efforts and buy the entire stock market? There’s no question the stronger yen is hurting exports, so perhaps we’ll see another salvo in the currency war. Who knows with Japan. They’ve been making it up for so long, nothing surprises anymore.
When it comes to surprises, though, the US presidential election campaign takes the cake. How has Trump managed to stay in front?
I’m going to crawl out on a very thin branch, one that is likely to snap and send me on an embarrassing fall to earth, but here goes…if Trump is the chosen Republican candidate, I think he can win the US presidential election.
There are a lot of obstacles in Trump’s way…not least himself.
First, he has to win the nomination at the Republican Convention in July. That will not be an easy feat. Barring some miracle, it’s unlikely Trump will be going to the Convention with the 1,237 delegates he needs to secure the nomination. Trump’s pledged delegates must vote for him in the first round. After that, they’re free agents. They can vote for the candidate of their choice…which may or may not be Trump.
Prior to going into battle with Hillary Clinton, Trump has to avoid tripping over himself, while attracting enough Republican delegates in July. Both of these are tall orders. That branch I’m edging out on is starting to creak and groan.
On the long shot he somehow emerges victorious from the Republican Convention, he has to beat the formidable Clinton political machine and its billion dollar war chest.
Each one of these obstacles are more than mere speed bumps on the road to the Oval Office…they are highway-blocking boulders. Trump will either crash…or crash through.
Given the enormity of the task, why do I think Trump could prevail against the odds in November?
Middle America has had a gutful. It’s well documented that in real (inflation adjusted) terms, the average US wage has been going nowhere for nearly 40 years.
Obama has made a lot of political mileage from the falling US unemployment rate. What he’s failed to mention is the corresponding decline in the labour force participation rate. More people are opting out of the workforce — moving on to social security — where they are no longer counted as unemployed…how convenient.
Nearly half of the jobs created since 2009 are in the low paid service and hospitality sector — where the average work week is 30 hours, and the average wage is US$16 per hour. Only 13% of the ‘new’ jobs have been created in higher paid occupations.
Statistically, and politically, it looks good when the unemployment rate falls from 10.1% (October 2009) to 4.9%. It creates the impression that ‘our strategies are working’…mission accomplished. Right?
The reality is the US population of 320 million is being supported by 122 million full time workers. Little wonder there’s growing unrest in the heartland.
Hillary, bankrolled by Wall Street and Bill’s lucrative speaking career, is a lightning rod for those looking to blame the rich and well connected for the demise of their living standards.
This is Clinton’s Achilles heel. Trump will exploit it and feed into the discontent.
In reality, neither Trump nor Clinton can genuinely fix the issue of income inequality that ails Middle America. Donald may provide a short term lift by announcing a whole host of projects to ‘make America great again’. But, in all likelihood, these will be more of the debt-funded, graft-riddled, underestimated and over-priced bridges to nowhere that politicians all around the world trot out to appear to be doing something.
The real reason Middle America has had a gutful is because the world has an excess of labour and productive capacity…we have a global ‘glutful’.
This is not something that can be fixed with the wave of a political wand. But that’s not what people want to hear.
In 2013, Daniel Alpert wrote ‘The Age of Oversupply: Overcoming the Greatest Challenge to the Global Economy’. Alpert’s theory is:
‘The suddenness and extent of the integration of over 3 billion people into a global capitalist market, that really only hitherto consisted of about 800 million in the advanced economies, produced not only the imbalances and glut conditions that have been written about extensively since the Great Recession, but have echoed in the many crises since then.’
After the Second World War, we (the developed nations) pretty much had the world to ourselves. The developing and underdeveloped world was left to fight over the scraps.
Our prosperity was contrasted by their poverty.
To maintain our first world standards of living, we outsourced the production of ‘things’ to countries where labour was not paid in dollars per hour, but in cents per day.
The ‘cents a day’ labour force was given a glimpse of what we in the developed world had. They rightly aspired to enjoy a lifestyle like ours — clean running water, working sewage, electricity, access to health services, education, etc.
While the wages in the developing world have moved from cents to dollars per day, their pay rate is still a long way off the minimum wage rates in the Western world.
The developing world has a pricing advantage multiplied by a factor of three billion, AND factories galore pumping out ‘stuff’ to sell to consumers in the developed and developing world.
When it comes to manufacturing, we in the West simply cannot compete. Which explains why the services sector — making coffees, waiting on tables, serving behind the counter selling those foreign produced goods — is the predominant provider of new job opportunities.
The under-pressure middle class American, Australian, European, Canadian and Japanese is not buying as much ‘stuff’ these days — as evidenced by a general slowing down in retail sales:
‘Weak U.S. retail sales reinforce Fed caution on rate hikes’ — Reuters, 13 April 2016
‘Retailers cop another hit with weaker spend in February’ — Qld Chamber of Commerce, 7 April 2016
‘Japan retail sales still on the soft side’ — Financial Times, 29 February 2016
A retreating Western consumer is not good for the aspirational class in China. Why? Because Chinese production slows down as a result.
When industrial production (the blue line) in China weakens, consumption (red line) also takes a hit.
Source: Alhambra Investment Partners
This is a classic negative feedback loop. The West reduces its demand due to income constraints; the East reduces production which, in turn, places income constraints on its aspirational population.
Too many people fighting over too few spoils. The squeeze is on.
The answer? A currency war.
Those developing countries with excess productive capacity, huge low cost labour forces, and negligible social security safety nets are going to do everything in their power to be competitive.
The Western countries with high cost labour, dwindling manufacturing bases, and the opportunity to access generous (by developing world standards) welfare systems are going to face further social, economic and budgetary pressures.
With hindsight, we had it all to ourselves for too long. We became complacent. Expectations and lifestyles were built based on the future being a replica of the past. We never envisaged having to share our good fortune with another three billion people.
This is why Alpert concluded:
‘…the invisible hand of capitalism is broken. Economic and political forces are preventing markets from correcting themselves, and we’re now living in an unprecedented age of oversupply.’
Politicians and central banks have done their utmost to prevent the West from receiving the wakeup call. Our first world lifestyles, built on mountains of debt and entitlements, must be maintained at all costs…irrespective of the economic realities.
The oversupply situation is not going away. The people exist, their aspirations are real, the factories have been built (with debts that need to be repaid), plus automation and robotics are gathering pace.
Too much supply for too little demand is a powerful deflationary force. This is not good news for the negative feedback loop.
Politicians like Trump will use the social discontent — people wanting the ‘good old days’ back — to their advantage. They’ll tap into peoples’ fears and echo these back to them.
People have had a gutful of feeling under pressure and will respond accordingly at the ballot box.
Unfortunately, any political ‘solution’ is only going to add to the problem.
The world has a glutful. That’s the real problem. The solution to this problem is a painful readjustment of expectations.
Editor, Markets and Money