The Island Of Relative Prosperity

“Japan’s economy tipped into a technical recession (alt) following a jump in consumption taxes in April, making it a near-certainty that prime minister Shinzo Abe will delay another increase while appealing for a fresh mandate via a snap election.  Monday’s preliminary data for the period between July and September was far worse than markets expected, showing a shrinkage of 1.6 per cent quarter-on-quarter on an annualised basis against analysts’ expectations for growth of 2.2 per cent, as businesses cut back spending.”  A drop in business inventories “shaved off 0.6 percentage points,” also “private consumption grew an annualized 1.5%, after a drop of 18.6% in the second quarter…Exports grew modestly — 1.3% quarter-on-quarter — but it was hardly enough to make up for weak demand.”  Meanwhile, Gavyn Davies says “the postponement of the second leg of the sales tax, as distinct from a permanent cancellation, would have almost no effect on fiscal sustainability (i.e. “this decision would add a negligible 0.75 percentage points to the 245 per cent public debt/GDP ratio”).”  However, “the decision would signal again that, at the zero lower bound for interest rates, monetary policy may not be powerful enough to offset the effects of fiscal tightening, so there may be a permanent choice to be made here.”  Furthermore, “the unspoken fear is that there may be no set of policies that allows the economic recovery to be maintained,” which might “cause a major crisis of confidence in the yen…perhaps with very little warning.”


Meanwhile, “only three out of 10 companies [in Germany] want to increase investments next year while one in four will spend less (alt)…the survey highlights Germany’s chronically weak investment, which has been the main reason for the country’s poor growth performance in the past six months.  Latest data released Friday showed that Europe’s largest economy narrowly escaped recession, growing by just 0.1% on quarter during the July-September period after a 0.1% contraction during the second quarter.”


Meanwhile, “U.S. manufacturing output rose in October, but a third straight month of declines in motor vehicle production hinted at some slowing in the pace of factory activity.”  Furthermore, “a measure of capital expenditure posted its highest reading in more than two years.  ‘This suggests that companies are increasingly looking to invest in additional plants and equipment, a factor which should help support GDP growth during the coming quarters.’”  Also, lower inflation expectations (i.e. rates will be lower for longer) are supporting stocks and bonds: “weak growth holds down oil and commodity prices.  It restricts worldwide wage gains.  All of that means lower inflation everywhere.  And because the U.S. is an island of relative prosperity, the dollar is strong, which reduces import costs.”


Meanwhile, “we know that sentiment towards US equities is running hot…So is the sentiment towards the dollar.  At the same time, ex-US markets and foreign currencies are largely feared; expectations are very low.  That also means their equities are relatively inexpensive: European CAPE is half the US and price to book is 40% lower.  For contrarians, this supports a hypothesis that a period of underperformance by US markets may be next.”  Also, while we are entertaining the devil’s advocate, here’s the glass-half-full story on Germany.