I wrote earlier about some elements of the consensus macro view and some risks to those views (and my own). A key part of tracking consensus (and identifying out of the consensus views), is keeping track of the questions investors and others are asking each other. I'll plan to gather some of these on an ongoing basis through the year to track the evolution of concerns and identify what consensus might be missing.
Key dilemmas remain mostly focused on policy choices and whether any policies might upend the macro resilience and market performance. Could this resilience fade? What would be the trigger? As typical queries are most prevalent on U.S. and Chinese policy, geostrategic issues, especially in the Middle East and North East Asia.
Global growth: is this the best we can get? What does that mean for asset returns? Will this pace of global growth be sufficient to create enough jobs in populous EM/Frontier countries o will it exacerbate political stresses and reinforce price pressures?
Impact of US fiscal policy: questions include the impact of the policies on U.S. and global demand, including the relative performance across sectors, across regions (especially in areas like New York, New Jersey and California) most vulnerable to the non-deductability of state tax, the impact on external balance and U.S. capital account? When would we worry about US debt finance ability?
Monetary policy transition (in terms of leaders and policy stance): Will the Fed/others overtighten to compensate? What credits are most vulnerable? Will the new board members shift policy? Many countries want to lag the Fed and would appreciate the weaker currency that may result, will they be able to do or will limitations of macro prudential measures call for a different trend?
Trade trends: Will any of the many trade agreements set in motion changes in supply chains? Are countries like Brazil finally opening up? Will measures increase the costs of compliance with different regulations (digital trade, localization , cybersecurity). Other policies (fiscal and monetary) are likely to have more effect but could the questions on the rules defer/front-load investment? Is there a new round of investment protection coming?
Valuation: Are US equities really expensive or are there drivers/buyback trends that justify valuations ? What about knock-on effects? is the credit downgrade cycle over in commodity producers?
China's policy space: Chinese authorities have plenty of tools to use but will doing so cap growth and undermine asset performance? Will Chinese corporate, government and quasi government bonds find buyers at a reasonable price? What will be the drivers of growth beyond 2018? Will Chinese export growth further undermine transpacific trade?
Europe risks? is Brexit irrelevant aside from the UK? Are the European banking systems and sovereigns solid enough? Has there been enough deleveraging? How concerning are signs of overheating in Eastern/Central Europe? Is the convergence story back on? Will Europe shift over to more domestic demand?
What’s going on in Saudi Arabia/the Middle East? Lots of questions about the Aramco IPO, the divergence between economic reforms and political approach. What is the strategy from the Saudi/Abu Dhabi nexus? What is the U.S. strategy in the region? Will the market absorb the planned bond and equity issuance (the latter is likely to increase significantly in 2018)? Will any pegs break in the next two years (watch Oman). Is the GCC completely irrelevant as a body? Will regional SWFs continue to turn inward? What are the new investment rules in the wake of the Saudi anti-corruption measures? Will the Qatar blockade just fade away as the country adjusts (and recent data suggests its a vey slow bleed) and other countries continue to trade with the country (see UK and French economic and military coordination).
What’s the next step on North Korea and will markets care: There seems to be a consensus that sanctions haven’t worked - with two groups among US policymaker one that seems to be pushing for some sort of military response and another that suggests living with deterrence policy to stop proliferation. That doesn’t;t mean no new sanctions but the growing importance of Russia in supplying fuel and funds is undermining cohesion while escalating sanctions against Chinese entities such as big banks would be seen as disproportionate and thus unlikely.
Energy market outlook: consensus believe that the market has made great strides towards balancing after the deficit in Q3 2018, but there are queries about the supply response of shale producers in the U.S. as well as the demand outlook ( U.S. China and India)? Will under investment would lead to strong price growth? Is financing a real issue for shale producers?
Impact of the oil rebalancing on geostrategy : Will rising prices exacerbate political issues in counties with civil conflict like Nigeria, Libya, Iraq. Will the desire to have a greater piece of this revenue lead to increased outages. In times of lower prices domestic interests coalesce. What impact will high prices have on importers. Many EM are only now passing on higher prices to consumers.
Infrastructure and commodity demand: With such ample liquidity, why are few projects being financed? What could change this outlook? What will the impact of belt and road Initiative and vertically integrated Chinese financing and product management? What will happen if projects don't make their returns? could there be a wave of defaults? Should we be worried about the build up in dollar liabilities in some frontier markets?
Inflation: Why is wage pressure still so weak when labor markets have tightened? Will wage pressure pick up more meaningfully in 2018 as output gaps close and commodity trends are less supportive of consumer purchasing power. With disinflation over how strongly will prices pick up in 2018/19? What about the few countries where policies are easy and real rates low (Turkey).
Global yields: The flattening of the U.S. yield curve has come in for a lot of debate, with questions whether its a harbinger of recession (hard to say given sizable CB intervention in the US and abroad). Market actors seem more comfortable with the Fed hiking path, and the Europe/Asia policy stance. Will rising yields make it more costly to refinance as 2019/20 liabilities come due or does it matter less as aggregate yields have fallen Does the fact that rates/spreads remain much lower than 5 years ago offset any increase in yields? Will investors get better at pricing risks. How will some new/old borrowers (Argentina, Saudi Arabia and households in China) adjust to rising debt service costs. Should we be worried peripheral spreads will widen hitting debt service costs?
Cyptocurrency and transactions: With the sharp rally in bitcoin and many countries getting into the game, how will regulators respond? How much demand reflects efforts to circumvent USD systems in countries with capital controls/sanctions?
Digital trade and transactions: Are we capturing well the impact of transactions on payments systems like Alipay? have we defined digital trade sufficiently and better understood the impact on innovation?
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Rachel's musings on macroeconomic issues, policy and more.