Global Economy I: Commodity Prices. Has President Donald Trump’s protectionism thrown a monkey wrench into the global synchronized growth mechanism? Joe, Debbie, and I started to see mounting signs of this scenario during the summer of 2016. We attributed it to the end of the energy-led commodity bust, which began during the second half of 2014 and ended in early 2016.
Debbie and I observed that the CRB raw industrials spot price index and the price of a barrel of Brent crude oil had bottomed at the start of 2016. We combine these two series to derive our Global Growth Barometer (GGB) (Fig. 1 and Fig. 2).
It plunged 50.5% from June 20, 2014 through January 20, 2016. Since then, it is up 63.6% to one of the highest readings since November 2014, confirming the solid rebound in the global economy. By the way, one of our accounts observed that our GGB is nearly identical to the Goldman Sachs Commodity Index (Fig. 3).
Global Economy II: The Dollar & Capital Flows. Since 2006, there has been a strong inverse correlation between our Global Growth Barometer and the trade-weighted US dollar (Fig. 4). They’ve diverged significantly recently as commodity prices remained firm while the dollar jumped 4.9% since February 1. This could spell trouble for the global synchronized growth scenario.
First, let’s briefly review why there has been an inverse correlation between the two. When the global economy is strong, commodity prices tend to move higher. Most commodities are priced in dollars. When foreign commodity exporters receive more dollars, they tend to diversify some of their windfalls into other currencies, particularly the euro and the yen. Commodity prices tend to fall when the global economy is weak, providing fewer dollars for commodity exporters to convert to other currencies.
The recent surge in the dollar coincided with Trump’s protectionist saber-rattling. Contributing to the dollar’s strength has been the growing realization that the Fed is likely to continue to raise interest rates and unwind its QE portfolio of securities, while both the ECB and BOJ may be doomed to maintain their ultra-easy monetary policies for the foreseeable future. Higher US interest rates and the stronger dollar can be a lethal cocktail mix for emerging market economies (EMEs) that have been guzzling lots of short-term debts denominated in dollars.
In other words, all the international capital that flowed into EMEs when the global economy and commodity prices were strong, and when EMEs had relatively attractive interest rates, can quickly turn into outflows when US interest rates are rising relative to the rest of the world and the dollar is strengthening.
Debbie and I constructed a proxy for global capital flows in and out of the US to the rest of the world by subtracting the world’s merchandise trade surplus with the US (on a 12-month basis) from the y/y change in world non-gold international reserves (Fig. 5 and Fig. 6). (For more information on this, see the “Capital Flows In and Out” section of my book Predicting the Markets, pp. 406-410.)
Our confidence in our proxy is increased by its strong inverse relationship with the yearly percent change in the dollar (Fig. 7). The dollar tends to strengthen when capital is flowing into the US from the rest of the world. It weakens when capital is flowing out of the US into the rest of the world. The recent surge in the dollar suggests that capital is flowing back to the US, which explains the weakness in EME stock prices and currencies (Fig. 8 and Fig. 9).
Global Economy III: Purchasing Managers. Confirming the global slowdown is the Global Manufacturing PMI, which fell to 53.1 during May, down from a recent peak of 54.5 during December (Fig. 10). Over this same period, the Advanced Economies component of this index fell 1.5 points to 54.7, while the Emerging Economies component fell 1.1 points to 51.1. Keep in mind that the latest readings for the overall index and its Advanced Economies component are still above their early 2014 readings. Furthermore, as Debbie reports below, the Global NM-PMI remained strong as well during May, led by the US.
Global Economy IV: Exports. Data available through March—i.e., just when Trump started to go rogue on protectionism—show world exports volume continued to rise into record-high territory late last year through early this year (Fig. 11). That’s confirmed by the sum of real US exports plus imports.
On the other hand, May data from the US ISM survey show that the sum of the sub-indexes for manufacturing new exports and for imports fell sharply from a record high of 123.3 during February to 109.7 in May, which is still a high reading (Fig. 12). This homebrewed indicator is highly correlated with the y/y growth in world exports, which fell to just 1.1% during March. So there are some preliminary signs that Trump’s protectionist saber-rattling may be starting to rattle trade.
Global Economy V: Forward Revenues. Joe and I aren’t seeing any signs of a global slowdown in analysts’ 52-week forward consensus expectations for the revenues of the MSCI stock composite indexes for the US, Developed World ex-US, and Emerging Markets (Fig. 13 and Fig. 14). The US series has been rising in record-high territory since February 2017, and continues to do so. The Developed World ex-US is showing a more robust rebound since early 2016 in local currencies than when denominated in dollars. The same can be said for Emerging Markets, though their revenues series in local currencies has been rising in record-high territory over the past year.
Global Economy VI: Stay Home. On Monday, we wrote: “Under the circumstances, Joe and I once again are recommending a Stay Home investment strategy rather than a Go Global one. We had been staying home during the current bull market until late 2016, when we saw signs of global synchronized growth and recommended a globally market-weighted stance on stocks. Now we are back to overweighting the US.”
A glance at the ratio of the US MSCI stock price index to the All Country World ex-US index shows that it was on a solid uptrend from 2011 through late 2016. It moved down sharply during 2017 in dollars and was relatively flat in local currencies (Fig. 15). Since late 2017, the ratio has been rising again in both dollars and local currencies.
The Eurozone may be on the verge of another existential crisis. Japan has been in a slow-motion geriatric crisis. EMEs could turn more distressed if the dollar continues to move higher (Fig. 16). Of course, hanging over all these concerns are Trump’s increasingly disjointed, convoluted, and muddled protectionist policies.
Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research.
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