This is a global stock market rout worth celebrating
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.