A View of the Present
The current scenario has the following relevant elements: China works so that its deceleration doesn’t turn into stagnation; The emerging economies of every continent try to adequate their economies to the new circumstances, as the prices of their export resources and raw materials have descended; The United States continues within a stable recuperation process, but some shadows in its internal political field could cloud over its advance, this is why it is said that the FED could revert the rise of interest rates it implemented at the end of 2015 and put them under zero; Japan sends positive signals that it is moving in the proper route to exit deflation, even though slower than ideal; Europe continues not defining its route towards a healthy growth and confronts the rising of some issues that threaten the political structure of the European Union; South America shows political change among many countries, which will change the alignment of their governmental programs and therefore their qualities as receptors of international investment; Oil price, with its enormous gravitational power, so diverse and even contradictory, on many different aspects of national economies, is again the subject of speculation, and the probability of a price rise appears, something unthinkable a few weeks ago; Gold price, a safe haven in times of storm, began the year with important rises and the insurances that cover banking mishaps increase their premiums, which, ultimately, shows that investors are looking for safe places in doubtful times.
The deceleration of Chinese growth since 2013, which in 2015 reached its lowest point in the last 24 years, directly or indirectly generated the fall in the prices of many minerals, in transport volume and oil, all of which generated a domino effect that extended to all global economic areas. Now China is facing great difficulties: its corporations are over indebted and have excess installed capacity, its steel mills are accused of international dumping, its exports lack enough demand, the realty market’s weakness persists, the yuan has depreciated, this created capital flight. Facing these circumstances, the authorities have tried to push growth in many ways: In November 2015 interest rates were lowered, and this did not produce the expected result, diminishing the legal banking reserve down to 0.5%. A measure that is calculated will increase the markets credit capabilities by an additional 20 billion dollars, directed at middle and small businesses. This pretends is to invigorate the Chinese economy, to increase internal consumption in order to create a market for its industry’s goods and services, which eventually will again require inputs and raw materials for its production. In this way, China, the world’s second economy, will share with the United States and Europe the task of pushing the economic development of the rest of the world. This process merits attentive observation.
In Europe, more than anywhere else in the world, there appears the fear that the monetary policies that took the United States out of the recession in 2009 and gave hope to Europe have stopped producing their effect: on one hand the reduction of interest rates and on the other what is called “QE” or the “printing of money for the acquisition of sovereign bonds” made by the respective central banks to put money in the hands of governments and the banks to impulse economic growth through public spending and capital financing for the development of industry, commerce and consumption. The case is that, even with these measures, the recovery is slow and inflation, which according to academics should be at least an annual 2%, is insufficient. The dangerous thing is for fear to pervade the market since there is nothing left to do, the ammunition for combating the ghost of another recession is depleted, because then all the actors could fall into an irrational spiral. This lack of hope, more obvious in the blue collar segment (for instance, the English “Chavs” who could vote for the Brexit, this is, Britain leaving the European Union) has already had many recent manifestations; The advent of anti-establishment movements like Podemos and Tsipras in Spain and Greece, or ultra-nationalistic movements as Le Pen’s in France and AFP in Germany, which, if they progress, would take the European continent to a period of political and economic instability that without doubt would influence and affect the rest of the world. The answer seems to be to reject that there is nothing to be done. Additional measures must be taken: add fiscal policies to the already taken monetary actions. If the reduction of interest rates, governmental purchase of bonds to promote public spending and the flexibilization of bank credit don’t generate enough lift, then measures of tax reduction must be implemented so that the money stays in the hands of the consumer, so that he spends it, instead of saving it, and in this way it reaches the market, to exit the lethargy which is one of the causes of low growth, a relative of recession.
Japan, which is coming from a large lost period or epoch, reappears as an important factor in the world scene (it is still the 3rd or 4th economy) due to the expansion of its foreign trade, pushed by China’s decay and the impulse of its internal measures and the reading of its indexes: its 3.1% unemployment level is the lowest in the last 20 years; the very possible increase of its minimum wage; its inflation, even though lower than the Japanese Central Banks’s goal of 2%, is hoped to reach this level once the contraction due low oil prices ceases, [and] this is added to the good economic perspectives arising from the Trans-Pacific Association Agreement (TPP), which includes 12 countries in the Pacific basin, including the USA, and 40% of the world’s GDP. Also, measures are taken towards reducing corporate taxes and improvements in corporate structures that will result in increased earnings and dividends plus shares rewards, the holders of which may obtain substantial dividends.
In the United States, the evolution of the November elections is generating some worries. Even though history suggests that the national “establishment” ends up imposing the essential political balance, there are those who question that a presidency of Mr. Trump won’t open international confrontations of different magnitudes; if his pre-election discourse, which promotes and bases its ascendancy on the invocation of North American roots, the white redneck worker, is extended onto executive policies, will it not create colliding or anti-American conditions that would damage the nation’s foreign trade? In the following months, the development of this phenomenon must be observed from the point of view of its relevance on the way in which American commerce with the different regions of the world develops: its effect on the world prices of commodities, oil, the dollar’s value against other currencies, etc., and to glimpse the positive or negative appreciation of corporate stock and fixed income securities prices, be these sovereign or private.
In South America and Cuba, political events that announce a change of the region’s geopolitics have occurred. The new Argentinian government is fine tuning agreements with its “vulture” creditors and it is possible that in the short term it will return to the financial markets to posit its sovereign bonds, and at the same time, the nation is returning to institutional order, with legal security as its flag, a circumstance that will restore the confidence of domestic and international investors. Brazil’s political crisis could generate a new political order led by a government that would change the current state of affairs and return that nation to the place it held as the preferred location in Latin America of great and small transnational industries. In Venezuela, winds of change in the short term are blowing and the reconstruction of that country will demand the return of monetary and human capital, along with international investment. The revolutionary socialist experiments in Ecuador, Bolivia and Nicaragua transit different circumstances, but in general, it is perceived that after more than a decade in power, they will end up, in the middle term, to give in to different currents, more oriented towards opening-up to capital, facilitating private corporations activities and the return of the exiled domestic savings.← Back to News Releases