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Loose monetary policy, pro-cyclical fiscal spending and geopolitical problems elsewhere in the world have seen US
equities sharply outperform the MSCI World ex-US Index since the financial crisis – but as fiscal stimulus wanes and the Fed hikes, can this last?
Warren Buffett’s favourite stock market indicator, the market capitalisation as percentage of GDP, suggests equity markets are at their peak.
This is the chart that keeps the US president angry. The US trade balance continues to widen as the US grows faster than the rest of the world, partly thanks to Trump’s stimulus package.
The US labour market has lost out since the iron curtain was lifted, adding over a billion workers into the global labour force. Firms outsourced production to lower their costs and boost profits, in time fuelling the rise of populism.
As wages in emerging markets rise and globalisation reverses, labour costs are starting to jump in developed markets – this, along with the upward pressure of tariffs on input costs, will limit the willingness and ability of central banks to provide support to the stock market in the event of an asset price correction.
Is home ownership sometimes a bad thing?
Manufacturing towns are frequently a monopsony, meaning that when an operation is mothballed, local unemployment goes through the roof. Academic research finds that due to rising home ownership rates, often thanks to well-intentionedgovernment programmes, the ability of workers to migrate to where the opportunities lie is limited – because they are saddled with negative equity.
One crisis, two responses.
Post financial crisis, US households underwent rapid deleveraging through higher saving or
default; Australia, on the other hand, helped by China’s huge stimulus package, levered up. As the cost of global funding rises, is it time for Australia to follow in the steps of the US?
China ran giant current account surpluses in the 2000s as it artificially supressed its currency to benefit exporters at the expense of consumers. But as its economy rotates to being more consumer-driven and the currency is defended to prevent capital outflows, China’s current account could move into deficit in 2019. The world’s biggest exporter of savings is about to become a capital importer; this will have a large impact on the cost of capital globally.