Sat. Jan 19th, 2019

Are we on the verge of a cycle change? | Economy

Are we on the verge of a cycle change? | Economy

The pulse to the world economy, throws current symptoms of concern to confirm those that are associated with a change of cycle, after years of sustained economic growth that happened to one of the most painful and long crises that are remembered. It is true that the short-term trend of growth worldwide remains, although with a lack of homogeneity in the different geographical areas, as these pass through different times of the cycle. Which also affects the exhaustion of the same, something that has been verified since last year.

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Understanding reiterative, by the proliferation of comments that are happening now on the epigraph, insist on phenomena such as: the outcome of Brexit; the pulse between the US and China over the tariff war, with protectionism as a threat; the end of Merkel's term, also that of Dragui; elections (in Spain, they will coincide, European, regional and, possibly, general), the evolution of oil and raw materials ... Although all in one way or another are going to exercise their prominence and have their impact throughout the year. It remains to be seen in what form, how the markets take it, in what percentage they are already discounted and, if there are one or several phenomena that coincide, so that the effects are more mild or serious, have greater or lesser consequences.

I agree with many analysts that the cycle is in a mature phase, but at all seems to be still exhausted, coexisting with still acceptable growths, controlled inflation rates and employment figures that, in some cases, the US, are surprisingly positive . In this sense, what may be of interest is to dwell on those phenomena that, as is often the case, could alter with a sudden change, how many times does it occur? The mere tendency of slowdown or deceleration, which is perceived for now.

One of the most indicative barometers of these changes in the economy has been the behavior of US bonds. When the difference between the yields of short and long-term bonds flattens, even worse if you invest and yield more short-term bonds than long-term bonds, leads to think that the end of the cycle has arrived. Currently this curve is already flat and close to invert. Since the Second World War, before the recession in the US the rate curve has been reversed. It is also true that since the curve has been reversed, a period of a few months has elapsed until the deceleration turns into a recession. But this period can be very random, depending on the sentiment of the investors and the degree of saturation that have reached the stock markets and markets of that country.

This leads us to touch another hot spot, the very one of the growth of the American economy that in this 2019 will become precisely the longest in history, although taking into account that the recovery of its economy has been much more moderate than in previous expansive cycles. That cycle, we can not forget, has been prolonged now because both investment and demand is being supported by Trump's fiscal reform, which is driving growth with pro-cyclical investments and in some types that despite the increases continue to be low. But it is a short-term policy that can carry with it its own antidotes and that finally explodes via prices or deficits. In its context, we also warn of the excessive behavior of the Wall Street, with technology serving as a motor and being the main responsible for the longest period bullish that market.

Focused on the traction of companies like Apple, Amazon, Microsoft and Google. Few and very powerful, for that reason without the firewall of the diversification. Recent doubts about Apple's sales and the uncertainty it suffers from the tariff war with China is proof of that weakness. Serve as a warning that in the last quarter this stock market has lost about 20%, which is the biggest drop since the financial crisis of 2008. But, to our knowledge, it has released only part of the foam of the corkage of a champagne with the who continues to celebrate their excesses.

Finally, the change of sign in the policy of the central banks. The FED first, with the "quantitative expansion" (QE), increased its balance by buying US Treasury bonds and MBS (mortgage-backed security) for about 4.3 trillion dollars, which increased the demand for them , by raising their prices and lowering interest rates. Something that not only created greater liquidity by injecting it into the balance sheets of banks, increasing their funds to grant loans, also increasing investors' appetite for risk to buy shares and corporate debt seeking higher returns. Now, with the "quantitative adjustment", when the FED decreases its balance, the opposite starts to happen, subtracting liquidity from banks and, in that sense, capacity to finance, to create liquidity. Something similar has happened with a certain delay in our continent, where at present the ECB with a debt purchase that has come to an end with the year and which, together with liquidity injections to the bank, has involved more than 3, 3 trillion euros. In view of the circumstances of the change of course of the economy, there is a commitment on the part of the ECB to renew the maturities of the current year.

In his case, Jerome Powell, president of the FED, engaged in the policy of gradual rate increases undertaken, in view of the observed slowdown symptoms, recently declared "we are prepared to change the course of our monetary policy in a significant manner if it is necessary ", gesture that found the immediate positive response of the stock markets. In those we are, the balloon has been inflated: global indebtedness is skyrocketing (the total accumulated debt in the world is 60% higher than what was in 2007, just before the outbreak of the financial crisis, and is equivalent to 182 trillion dollars) and the overvaluation of assets reaching unrealistic prices. Deflating it without exploding is an obvious risk, hence prudence fear? of which the central banks now show. A further latent risk in this scenario of 2019, where we just spent his mat.

All the reviewed ones, without discarding the unexpected black swans, can be constituted in fuze for a change that accelerates the current direction of the cycle, to which in normal conditions a certain route would still remain.

Antonio Pedraza is President of the Financial Commission of the General Council of Economists


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