Sunday, September 13, 2015

As Global Cross-Currents Increase ...

  • Last week, in the Washington Post article “Why the Fed must stand still on rates”, former U.S. treasury secretary Larry Summers said, “the data flow suggests a slowing in the U.S. and global economies and reduced inflationary pressuresEmployment growth appears to have slowed downcommodity prices have fallen further, and the general data flow has been on the soft side … when people argue that a 0.25 % hike will have little impact … my head spins a bit … I believe that conventional wisdom substantially underestimates the risks in the current moment. It bears emphasis that not a single postwar recession was predicted a year in advance by the Fed, the federal government, the International Monetary Fund or a consensus of forecasters … now is the time for the Fed to do what is often hardest for policymakers. Stand still.”  
  • Citibank chief global economist Willem Buiter said “We consider China to be at high and rapidly rising risk of a cyclical hard landing … should China enter recession – and with Russia and Brazil already in recession – we believe that many other emerging markets, already weakened, will follow, driven in part by the effects of China’s downturn on the demand for their exports, and, for the commodity exporters, on commodity prices … We believe that a moderate global recession scenario has become the most likely global macroeconomic scenario for the next two years or so.”  
  • As Standard & Poor’s cut Brazil’s investment grade credit rating to junk, it said   “We find that the ongoing investigations of corruption allegations against high-profile individuals and companies — in both the private and public sectors and across political parties — have led to increased near-term political uncertainty.” 
MY TAKE
  • Regarding Summers’ comments – There has been significant debate about how an interest rate increase by the U.S. Federal Reserve would affect the economy. Historically, there is little evidence that a rate increase would avoid at least some market turbulence.  
  • Regarding Buiter’s comments – With global markets increasingly interconnectedweakness in any major economy will likely have broad global impact.
  • Regarding Brazil’s downgrade – In recent years, improving economic trends in the BRIC countries (BrazilRussiaIndia and China) attracted significant investment capital. Today's economic challenges in emerging markets suggest pursuing more prudent investment approaches.

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