We often get these big macro growth numbers, and in honor of Davos it is worth pondering what they mean, if anything, for American companies.
Yesterday, we got two figures that were pretty ugly: a guide-down in a world growth forecast from the IMF, 3.5% versus just 3.7% made in October; and a Chinese growth figure for 2018, 6.6%, the worst since 1990. Plus Chinese unemployment went from 4.8% to 4.9% -- in stark contrast to U.S. employment, for certain.
The IMF's Managing Director, Christine Lagarde, made it pretty darned clear when she said, "The world's economy is growing more slowly than expected and risks are rising."
Lagarde blamed slowing in Europe, which can be related to how much business Europe does in China. It sure can't be related to the central bank, which has been keeping rates low for years.
China can't help, because it turns out that our companies' scrambling to make things away from China because of the coming tariffs is really roiling China far more than anyone -- except the small subset of China bears and an even smaller subset of those of us who think of China as a paper tiger -- would believe.
I am of several minds about the macro. First, it sure hasn't meant much to our unemployment rate, which seems deeply related to a rapid decline of immigration coupled with a tax-stimulated boom. Second, though, it has led to a strong dollar, giving our international companies based here a distinct disadvantage. Three, it is forcing leadership in the market to switch to defensives, with the rise in oil the only contradictory evidence to the flow of funds. Fourth, it doesn't explain the real weakness in the economy, which is housing. That's because housing got unaffordable until higher rates caused a back-up in homes, causing the decline and resurrection of the cohort.
What does it mean for the overall market?
I think it is all about the mind of Jay Powell. If the Fed chairman factors in international weakness and home-related weakness, there's a solid case for staying his hand until things get stronger.
If we get a trade deal, however, and rates stay low, then we should be humming. And if we are really cranking, then the economy can handle a couple of rate increases.
It would be welcome to see some inflection in the curve because of loan demand: The big loan growth from JP Morgan (JPM) and Bank of America (BAC) should have caused those rates to rise. But I think the 10-year and 30-year Treasuries are being kept down in yield and up in price because no one else's bonds in the world make any sense to own. This is why the Treasury would be smart to raise several hundred billion in 10-year Treasuries, especially because the Fed is so foolish in not doing the same for its balance sheet. I know that's a de facto tightening, but that's all that's really needed with these figures.
Either way, the weakness in China improves the prospect of a trade deal -- provided that the Chinese somehow become willing to acknowledge that they steal IP. I bet they are trying to figure out how to show that they do.
The solution is pretty easy: Grant our companies the rights to operate independently of China, be willing to prosecute those who steal, including the execs who run Xiaomi, and then let the telcos offer subsidies for Apple (AAPL) phones on par with domestics, and it's a done deal.
Then don't listen to those who would warn about rate hikes. They would be justified a few quarters from now if the world's economy picks up. Not yet, though, too dangerous.
