This is a global stock mar­ket rout worth cel­e­brat­ing

The Pak Banker - - OPINION - Am­brose Evans-Pritchard

WE toil­ing work­ers can al­low our­selves a wry smile. For most of the last eight years the own­ers of wealth and in­flated as­sets have had things their own way, while the real econ­omy has been left be­hind. The ta­bles are fi­nally turn­ing. The world may look ab­so­lutely ghastly if your met­ric is the stock mar­ket, but it is much the same or slightly bet­ter if you are at the coal face. The MSCI in­dex of world eq­ui­ties has fallen al­most 20pc since its all-time high in May of 2015, im­ply­ing a $14 tril­lion loss of pa­per wealth. Yet the world econ­omy has car­ried on at more or less at the same ane­mic pace, and the OECD's global lead­ing in­di­ca­tors show no sign that it is sud­denly rolling over now. World growth has been drea­rily sta­ble for years, shuf­fling along at 3.4pc in 2012, 3.3pc in 2013, and 3.4pc in 2014, and 3.1pc in 2015. The In­ter­na­tional Mon­e­tary Fund ex­pects 3.4pc this year. The lat­est "GDPNow" tracker from the At­lanta Fed­eral Re­serve sug­gests that US growth is run­ning at 2.5pc in the first quar­ter, smack in line with a typ­i­cal late-cy­cle ex­pan­sion in a ma­ture econ­omy.

So, at the risk of stick­ing my neck out a long way, let me sug­gest that the equity blood­bath this year is lit­tle more than noise in the par­tic­u­lar set of cir­cum­stances fac­ing us. Stu­dents of the 1930s and the Key­ne­sian liq­uid­ity trap might even ar­gue that it is pos­i­tively good for the world econ­omy to the ex­tent that it re­flects an ero­sion of the global sav­ings glut - the ul­ti­mate cause of our Long Slump - and en­tails a shift in spend­ing power back to or­di­nary peo­ple. Oil rev­enues of the OPEC car­tel have crashed from a peak of $1.2 tril­lion to $400bn at to­day's Brent prices of $31 a bar­rel, amount­ing to an $800bn an­nual trans­fer to con­sumers in Europe, China, In­dia, and even the US - still a net ben­e­fi­ciary of cheaper oil. Note that the Texas econ­omy is so di­ver­si­fied that it has largely shrugged off the shale crunch in its own back­yard. This trans­fer acts as a shot of global stim­u­lus, akin to a tax cut. Saudi Ara­bia, the Gulf states, Al­ge­ria, and Nige­ria - as well as non-OPEC pro­duc­ers like Azer­bai­jan - have not off­set this gain to global spend­ing power with com­men­su­rate cuts in their own bud­gets. They are run­ning down their for­eign as­sets and sov­er­eign wealth funds to put off the pain of aus­ter­ity, or to "smooth con­sump­tion" in the jar­gon. Saudi Ara­bia's net hold­ings of over­seas se­cu­ri­ties fell by $23bn in the sin­gle month of De­cem­ber. Fitch Rat­ings ex­pects Abu Dhabi to drain its fund (ADIA) by $27bn this year. The Nor­we­gians be­gan dip­ping into their $820bn fund in Oc­to­ber. A clutch of dis­tressed sellers are hav­ing to liq­ui­date stocks, bonds, and prop­erty for month af­ter month on a grand scale. This is the ex­act re­ver­sal of what hap­pened dur­ing the com­mod­ity boom when they si­phoned off their sur­pluses - thereby de­priv­ing the world econ­omy of ag­gre­gate de­mand - and pumped up global as­set prices.

This is a stock mar­ket rout we should cel­e­brate. The money is ro­tat­ing out of the mar­kets and into our pock­ets. Amer­i­cans have hardly be­gun to spend their bo­nanza. They have let it pile up in bank ac­counts, push­ing up the US house­hold sav­ings rate from 4.5pc to 5.5pc in fif­teen months, much to the sur­prise of the Fed. Sooner or later they will spend it, un­less you think Amer­ica has un­der­gone a Pu­ri­tan con­ver­sion. This stim­u­lus has been ob­scured by the im­me­di­ate and highly con­cen­trated shock from the en­ergy crash. The In­ter­na­tional En­ergy Agency says oil and gas com­pa­nies slashed in­vest­ment by $140bn last year. This has been painful, but it is a di­min­ish­ing ef­fect in macro-eco­nomic terms. And no, the oil price slump does not it­self send any use­ful sig­nal about the health of the global econ­omy. The price slide is al­most en­tirely the re­sult of over-sup­ply, greatly com­pounded by OPEC's political de­ci­sion to flood the mar­ket to flush out ri­vals, and to slow the on­rush of re­new­ables. It is a text­book "pos­i­tive sup­ply shock", worth 2pc of world GDP So let us take a cool view of th­ese deranged mar­kets, un­flus­tered so long as the sell-off does not es­ca­late into a crash, or se­ri­ously pol­lute the credit trans­mis­sion mech­a­nism of global fi­nance. The wild card re­mains the vol­ume of cap­i­tal flight from China, and what that money is be­ing used for. The Peo­ple's Bank (PBOC) has run through $300bn of for­eign re­serves over the last three months. At this pace it is just four months away from the safe floor of $2.8 tril­lion un­der the IMF's ad­e­quacy met­ric for a coun­try with a pegged ex­change rate. If the out­flows are largely to pay off dol­lar bank loans and "carry trade" po­si­tions - a wise pre­cau­tion as the Fed drains dol­lar liq­uid­ity - they are harm­less and will burn them­selves out be­fore long.

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