MacroScope

from Global Markets Forum Dashboard:

China economic reforms may result in $14.4 trillion GDP, growth at 6 percent – Asia Society report

Sweeping economic reform initiated by China President Xi Jinping in November 2013 marked a turning point for the world's second biggest economy. If implemented fully, China's potential GDP growth can be sustained at 6 percent through 2020. One risk: Falling short of that growth rate could result in growth at half that projection, or worse, leading to a new economic crisis, according to a new study.

Dan Rosen, founding partner, Rhodium Group

Dan Rosen, founding partner, Rhodium Group

Dan Rosen, author of a report for the Asia Society Policy Institute, argues that China's growth model is no longer working. The drivers that contributed to China's post-1978 growth are weakening, with existing investments showing diminished returns and overall total-factor productivity, or TFP, falling. TFP is an economic term that broadly measures efficiency using input factors such as labor and capital. "Demographic dividends propelled China through the 1980s, 1990s, and 2000s, but the labor force is now at its largest and is poised to shrink," he writes.

Yet Rosen said China has not exhausted its growth potential. He forecasts decades of solid growth if President Xi can pull off bold economic reform. No small task.

"We conclude that the overhaul is well conceived and showing movement, and that if fully implemented can sustain growth at 6% through 2020," Rosen told the Global Markets Forum. "Keeping GDP at or above 6% though 2020 delivers a $14.4 trillion Chinese GDP, which supports $10 trillion in two-way financial flows and a Chinese trade deficit thanks to greater imports. That's great for the region and great for the global outlook."

Rosen has been analyzing China's economy for about two decades, first at the Peterson Institute, then at the White House/National Security Council and most recently at the Rhodium Group, a research and advisory group he co-founded.

from Global Markets Forum Dashboard:

GMF @HedgeWorld West, World Bank/IMF and Financial & Risk Summit Toronto 2014

(Updates with guest photos and new links).

Join our special coverage Oct. 6-10 in the Global Markets Forum as we hit the road, from the West Coast to Washington to the Great White North.

GMF will be live next week from the HedgeWorld West conference in Half Moon Bay, California, where we’ll be blogging insight from speakers including Peter Thiel, former San Francisco 49ers great Steve Young and other panelists' viewpoints on the most important investment themes, allocation strategies, reputation risk management ideas and more.

 

 

Eric Burl, COO, Man Investments USA

Eric Burl, COO, Man Investments USA

Our LiveChat guests at HedgeWorld West include Jay Gould, founder of the California Hedge Fund Association, on Monday; Rachel Minard, CEO of Minard Capital on Tuesday; and Eric Burl, COO of Man Investments, on Wednesday discussing the evolving global investor. If you have questions for them, be sure to join us in the GMF to post your questions and comment.

Follow GMF’s conference coverage and post questions live via our twitter feed @ReutersGMF as well, where we’ll post comments from other HedgeWorld panelists. They include: 

The Fed’s taper and the question of the “tag-along” $5 billion

By Ann Saphir

Federal Reserve policymakers are expected next week to trim their monthly purchases of bonds by another $10 billion, putting them on track to end the massive program by October or December. So – which will it be, October or December? Some Fed officials are pushing for an answer, and soon.

“I am bothered by the fact that I don’t really know what we are going to do on that,” Narayana Kocherlakota, the dovish chief of the Minneapolis Fed, told reporters last month. “It’s another signal that we are not being as clear about our policy choices as we should be.”

If the Fed continues to taper the program by $10 billion at each meeting, monthly bond purchases will be down to $15 billion by the time of the October policy-setting meeting. Richard Fisher, the hawkish head of the Dallas Fed, told Reuters in late May, “I will vote to end it in October.”

Scrambling to flesh out skeleton Fed board

“It’s about time” was the general reaction when on Thursday the Senate Banking Committee scheduled a vote on Barack Obama’s nominees for the Federal Reserve board. Not that Stanley Fischer, Lael Brainard and Jerome Powell (a sitting governor who needs re-confirmation) have been waiting all that long; it was January that the U.S. president nominated them as central bank governors, and only a month ago that the trio testified to the committee. The urgency and even anxiety had more to do with the fact that only four members currently sit on the Fed’s seven-member board and one of those, Jeremy Stein, is retiring in a month. The 100-year old Fed has never had only three governors, and the thought of the policy and administrative headaches that would bring was starting to stress people out. After all, the Fed under freshly-minted chair Janet Yellen is in the midst of its most difficult policy reversal ever.

“Boy it would be more comfortable if there were at least five governors and hopefully more” to help Yellen “think through these very difficult communications challenges,” said Donald Kohn, a former Fed vice chair. Former governor Elizabeth Duke, who stepped down in August, said one of the Fed board’s strengths is its diversity of members’ backgrounds. “With fewer people you don’t have as many different points of view on policy,” she said in an interview.

The Senate committee votes on the three nominees April 29. But they can’t start the job until the full Democratic-controlled Senate also schedules a vote and gives them the green light.

Is it time for the ECB to do more?

From financial forecasters to the International Monetary Fund, calls for the European Central Bank to do more to support the euro zone recovery are growing louder.

With inflation well below the ECB’s 2 percent target ceiling and continuing to fall, 20 of 53 economists in a Reuters Poll conducted last week said the bank was wrong to leave policy unchanged at recent meetings and should do more when it meets on Thursday.

And the pressure on the ECB to do more has mounted after the preliminary inflation estimate for March was published on Monday. The data showed inflation cooling down further to 0.5 percent, its lowest since November 2009.

The much-anticipated “capex” boom? It’s already happening, and stocks don’t care

It’s a familiar narrative: companies will finally start investing the trillions of dollars of cash they’re sitting on, unleashing a capital expenditure boom that will drive the global economy and lift stock markets this year.

The problem is, it looks like an increasingly flawed narrative.

For a start, capital expenditure, or “capex”, has already been rising for years. True, the Great Recession ensured it took three years to regain its 2007 peak. But the notion companies are just sitting idly on their mounting cash piles is misplaced. As Citi’s equity strategists point out:.

“The death of global company capex has been much exaggerated.”

A new report from Citi shows that since 2010, global capex has risen 26% to $2.567 trillion. It’s never been higher:

Japan-style deflation in Europe getting harder to dismiss

To most people, the idea of falling prices sounds like a good thing. But it poses serious economic and financial risks – just ask the Japanese, who only now finally have the upper hand in a 20-year battle to drag their economy out of deflation.

That front is shifting westward, to the euro zone.

Deflation tempts consumers to postpone spending and businesses to delay investment because they expect prices to be lower in the future. This slows growth and puts upward pressure on unemployment. It also increases the real debt burden of debtors, from consumers to companies to governments.

In many ways, policymakers fear deflation more than inflation as it’s a more difficult spiral to exit. After all, interest rates can only go as low as zero and if that doesn’t kickstart spending, they’re in trouble. Again, just ask the Japanese.

A week before emerging-market turmoil, a prescient exchange on just how much the Fed cares

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The last seven days has been a glaring example of fallout from the cross-border carry trade. That’s the sort of trade, well known in currency markets, where investors borrow funds in low-rate countries and invest them in higher-rate ones. Some $4 trillion is estimated to have flooded into emerging markets since the 2008 financial crisis to profit off the ultra accommodate policies of the U.S. Federal Reserve, Bank of Japan, European Central Bank and the Bank of England. Now that central banks in developed economies are looking to reverse course and eventually raise rates, that carry trade is unraveling fast, resulting in the brutal sell-off in emerging markets such as Turkey and Argentina over the last week.

The Fed’s decision on Wednesday to keep cutting its stimulus effectively ignores the turmoil in such developing countries. And while the Fed may well be right not to overreact, it makes one wonder just how much attention major central banks pay to the carry trade and its global effects — and it brings to mind a prescient exchange between some of the brightest lights of western economics, just a week before emerging markets were to run off the rails.

On January 16, minutes before Ben Bernanke took the stage for his last public comments as Fed chairman, the Brookings Institution in Washington held a panel discussion featuring former BoE Deputy Governor Paul Tucker, Harvard University professor Martin Feldstein and San Francisco Fed President John Williams. They were asked about the global effects of U.S. monetary policy:

Why are US corporate profits so high? Because wages are so low

U.S. businesses have never had it so good.

Corporate cash piles have never been bigger, either in dollar terms or as a share of the economy.

The labor market, meanwhile, is still millions of jobs short of where it was before the global financial crisis first erupted over six years ago.

Coincidence?

Not in the slightest, according to Jan Hatzius, chief U.S. economist at Goldman Sachs:

Ireland: bailout poster child, but hardly textbook

Amid the euphoria surrounding Ireland’s removal from junk credit rating status, it’s easy to get swept along by the consensus tide of opinion that the Emerald Isle is the “poster child” for euro zone austerity.

But were another country to find itself in Ireland’s unfortunate financial predicament now, few would suggest it follow the path Dublin took.

The Irish government assumed the entire nation’s private banking sector debt in 2008 after then finance minister Brian Lenihan explicitly guaranteed all bank debt in the country. It was hailed as a masterstroke at the time, but in an instant Ireland’s hands were tied and its options all but evaporated. Even the stuff that posed no systemic risk was put on the government’s – the taxpayers’ – books. This prevented the collapse of the financial system, but at a price: the country’s sovereign debt load almost doubled to around 100% of annual economic output, and in order to do that it was forced to take an €85 billion bailout from international creditors two years later.