US econ­omy faces ‘Wile E Coy­ote mo­ment’

The Sunday Telegraph - Money & Business - - Front page - By Tom Rees

THE FTSE 100 is on course for its worst year since the fi­nan­cial cri­sis as econ­o­mists warn that in­vestors need to brace for a “Wile E Coy­ote mo­ment” when the over­heat­ing US econ­omy runs off a cliff edge in 2020.

Around $3 tril­lion (£2.3 tril­lion) was wiped off the value of global stock mar­kets in a week-long rout sparked by fears of surg­ing US bor­row­ing costs. How­ever, the Cen­tre for Eco­nom­ics and Busi­ness Re­search has warned that its model sug­gests that US stocks are still over­val­ued by around 30pc even af­ter this week’s sell-off.

The FTSE 100 has now tum­bled 9pc in 2018 af­ter mar­kets were rocked by ex­pec­ta­tions of the Fed­eral Re­serve main­tain­ing the brisk pace of its in­ter­est rate rises in an ef­fort to rein in the boom­ing Amer­i­can econ­omy.

How­ever, a “poi­sonous mix” of re­duced fis­cal stim­u­lus, higher in­fla­tion, ris­ing in­ter­est rates and pro­tec­tion­ism could com­bine to slow the US econ­omy in the com­ing years, Gre­gory Daco, US econ­o­mist at Ox­ford Eco­nom­ics, ar­gued. Eco­nomic “growth ex­haus­tion could be the real Wile E Coy­ote mo­ment in 2020”, he pre­dicted.

Slow­ing growth in the world’s largest econ­omy could add to ex­ist­ing re­straints on the UK econ­omy. The EY ITEM Club, which uses the Trea­sury’s model for the econ­omy, has down­graded its GDP growth fore­cast for 2019 by 0.1 per­cent­age point to 1.5pc as Brexit and trade war un­cer­tainty bite.

The US 10-year Trea­sury yield – a bench­mark bor­row­ing rate for global mar­kets – hit its high­est level in seven years this week as mar­kets scram­ble to ad­just to strength­en­ing growth and in­fla­tion in the States.

Mar­kets are pric­ing in at least three more in­creases in US bor­row­ing costs in the next year. The Fed is “un­der­es­ti­mat­ing the im­pact” of its rate rises, Michael Pearce at Cap­i­tal Eco­nom­ics warned. He said its hikes have trans­lated into “a larger than usual in­crease in mar­ket in­ter­est rates”, caus­ing growth to “sharply” drop when Mr Trump’s fis­cal stim­u­lus wears off.

‘If Pow­ell keeps up the fiery rhetoric, US stock mar­kets will con­tinue to fall, drag­ging all oth­ers with them’

Any politi­cian who asks, like some kind of fund man­ager, to be judged by stock-mar­ket per­for­mance is go­ing to end up dis­ap­pointed, but that doesn’t seem to stop them re­peat­edly play­ing that game. When the Dow was soar­ing, Don­ald Trump was more than happy to claim the credit, and take it as a vote of con­fi­dence in his poli­cies. Now it’s stalling, he blames the Fed­eral Re­serve for “go­ing loco”.

Mr Trump has plenty of form when it comes to Fed bash­ing. Cam­paign­ing for the pres­i­dency, he would rou­tinely ac­cuse Janet Yellen, the chair­man at the time, of hold­ing rates low so as to ben­e­fit his ri­val Hil­lary Clin­ton. Now he’s in power, he ex­pects the go-easy treat­ment. Rates should be held low, he ar­gues, to counter any neg­a­tive con­se­quences from his trade war with China.

Jay Pow­ell, his own sup­pos­edly com­pli­ant re­place­ment for Yellen, is prov­ing a big dis­ap­point­ment. Trump thought he had ap­pointed a cheap money guy who would keep the stock mar­ket well juiced. In­stead, Pow­ell has so far proved a sur­pris­ingly in­de­pen­dent hawk who threat­ens to mur­der Trump’s bull mar­ket in its bed. Ev­ery time he opens his mouth, he seems to grow fiercer still. The econ­omy has been driven to boil­ing point by the Pres­i­dent’s fis­cal stim­u­lus, he seems to be say­ing; the in­fla­tion­ary con­se­quences need to be coun­tered.

Stock mar­kets can be dif­fi­cult things to read, but on this oc­ca­sion it is sur­pris­ingly easy. If Pow­ell keeps up the fiery rhetoric, then US stock mar­kets will con­tinue to fall, drag­ging all oth­ers with them. If, on the other hand, Mr Pow­ell is per­suaded by a bul­ly­ing Mr Trump to come grov­el­ling on bended knee to the White House to re­pent his sins, then mar­kets will en­joy some kind of re­prieve. Re­ver­sal is what in­vestors hope for. Hyped into bub­ble ter­ri­tory by the Fed, mar­kets can also be saved by the Fed. But if he chooses that route, it will be cur­tains for any no­tion of Fed­eral Re­serve in­de­pen­dence. He’ll be seen to have caved. He’s damned if he does, and damned if he doesn’t.

Saudi mis­ery

BAE Sys­tems, Bri­tain’s largest de­fence con­trac­tor, finds it­self be­tween a rock and a hard place over the dis­ap­pear­ance of the Saudi dis­si­dent Ja­mal Khashoggi. Un­der a gov­ern­mentto-govern­ment con­tract, BAE has sev­eral thou­sand staff work­ing in the king­dom and is in the midst of ne­go­ti­a­tions to sell bil­lions of pounds worth of Tor­na­does to the Saudi mil­i­tary. Its ex­po­sure is mir­rored in a wider sense by that of the UK Govern­ment it­self, which re­lies heav­ily on in­tel­li­gence co­op­er­a­tion with the Saudis and re­gards the king­dom as a key ally in the re­gion.

Al­ready grap­pling with the out­rage of at­tempted as­sas­si­na­tions on UK soil by Putin’s Rus­sia, the UK can­not be seen to be turn­ing a blind eye to what may very well be the same thing by the Saudis in Is­tan­bul. Pre­sum­ably, the ev­i­dence for what oc­curred will soon be avail­able to all. Turkey claims to have a se­cret video record­ing. One hardly needs to ask how it might have come by such a smok­ing gun. If it ex­ists, it can only be a mat­ter of time be­fore it gains univer­sal ex­po­sure.

If the work of a Saudi hit squad, then the next ques­tion has to be who au­tho­rised the killing and at what level? Mo­hammed bin Sal­man’s grip on the king­dom has looked in­creas­ingly frag­ile in re­cent months, com­pound­ing sus­pi­cions that it goes all the way to the top. Ab­sence of any re­sponse from the crown prince has only height­ened the sense of dis­ar­ray.

Is this just an­other piece of un­for­tu­nate Mid­dle East­ern in­trigue that will soon blow over, or is it some­thing much more se­ri­ous? Trump has sug­gested the for­mer; he is de­ter­mined it is not go­ing to in­ter­fere with US de­fence or­ders. But Jeremy Hunt, the UK De­fence Sec­re­tary, has been more forth­right, as he must with the Sal­is­bury nerve-agent at­tacks in mind. And even Trump could be forced by a plainly in­censed Congress into ap­ply­ing sanc­tions. The dan­gers are ob­vi­ous; as has oc­curred with As­sad’s Syria, the mo­ment the West va­cates its strongholds in the Mid­dle East, there will be oth­ers more than will­ing to step into the breach, not just Rus­sia, but also an in­creas­ingly as­sertive China. Dan­ger­ous times in­deed, and a vir­tu­ally im­pos­si­ble judg­ment call for the UK Govern­ment.

Shell’s tran­si­tion­ing chal­lenge

Over the next few years, Big Oil faces a ma­jor strate­gic de­ci­sion; the big­gest, in fact, since to­day’s six or seven “su­per­ma­jors” came into ex­is­tence. Do they ac­cept that pres­sure to de­liver a zero-car­bon world means their time is draw­ing to a close, and be­yond en­sur­ing a ba­sic level of in­vest­ment in ex­ist­ing re­serves, put them­selves into run-off? Or should they cap­i­talise on abun­dant cash flow to trans­mo­grify into more sus­tain­able gen­eral en­ergy sup­pli­ers that have a long-term fu­ture?

Ma­jor in­vestors tend to fall into three cat­e­gories in an­swer­ing this ques­tion. Some urge man­age­ments not to take cli­mate change se­ri­ously at all, and stick to what they know best. Oth­ers say sim­ply that in­vest­ment in en­ergy al­ter­na­tives is val­uedestruc­tive and there­fore not worth both­er­ing with; it is for in­vestors to de­cide which en­ergy as­sets they hold, not man­age­ments. Still oth­ers take a more pos­i­tive at­ti­tude, and in recog­ni­tion that most other en­ergy providers lack the scale to man­age the tran­si­tion, urge a more am­bi­tious ap­proach to the fu­ture. Sup­port for this third case comes in new re­search from Gold­man Sachs which ar­gues that the oil ma­jors have the op­por­tu­nity to lead from the front in de­liv­er­ing a two-de­gree world. Not only would it en­sure long-term sur­vival, Gold­man ar­gues, but in adopt­ing such an ap­proach they could even en­hance their re­turns to share­hold­ers.

Any such tran­si­tion is go­ing to re­quire im­mense skill and vi­sion. Many in­vestors will re­main scep­ti­cal. But if the busi­ness case can be made for it, and if the re­turns are made demon­stra­ble, then there is no rea­son to be­lieve they can­not be won over.

Un­der chief ex­ec­u­tive Ben van Beur­den (see Jil­lian Am­brose’s in­ter­view on pages 6 and 7) Shell al­ready in­vests about $2bn (£1.5bn) a year in al­ter­na­tive sources of en­ergy. This might seem small beer in the con­text of to­tal cap­i­tal spend­ing of $25bn, but even so it makes Shell one of the big­gest sin­gle in­vestors in the world in ad­dress­ing the cli­mat­e­change is­sue.

As things stand, Shell is a div­i­dend gusher without equal – a whop­ping great $16bn was paid out last year. It’s the ul­ti­mate in­come stock. It would be nice to see that sus­tained into the long-term fu­ture. Tran­si­tion­ing from Big Oil to Big En­ergy is a path fraught with dan­ger; it could as eas­ily prove the com­pany’s un­do­ing as its sal­va­tion. But it’s per­haps bet­ter to at least test that path than the al­ter­na­tive – slow death by a thou­sand cuts.

A trader re­acts at the New York Stock Ex­change as stocks ex­tended deep losses in volatile trad­ing on Thurs­day

Newspapers in English

Newspapers from UK

© PressReader. All rights reserved.