Economic Lifeboats : Ask Yourselves, Are You Spending ?

In memory of John Nash, inspiration for the film, A Beautiful Mind, who passed away in a car accident with his wife last Saturday.

Game theory and economics have gone hand in hand since his pioneering work which won him a Nobel prize in 1994 when he was 65 and since, we have people like Yanis Varoufakis and many others, the game theory economists.

Since I cannot claim to be an expert in either economics or game theory, let’s just stick to common sense.

In the past week, we had some major calls were made that some may  have missed or dismissed and which were hidden out of sight on mainstream media.

The big call made it all the way to the Telegraph with Pritchard seeing it fit to mention Stephen King of HSBC comparing the state of the global economy to “an ocean liner without lifeboats.”

With global debt up 40% since 2008, at S$ 200 trillion which is three times the size of the global economy and policy makers as stretched as they are, there is are no credible bullets left in case of an emergency.

This is as Deutsche Bank estimates that market sentiment has now crossed from the complacency zone into outright Mania as the “PE/VIX market emotion indicator climbed to 1.3 on S&P trailing PE of 18 and 3m avg VIX of 14. A level between 1.2-1.5 signals complacency.” The last time this happened was right before the last financial crisis of 2008.

Separately, we have a sudden and rare changes in Saxo Bank’s long term outlook model which has been stable for the past 2 years and 75% vested in bonds.

According to the model, we should expect the following in the coming months.

  • US, German and EU core government bonds will be 100 bps higher by and in Q4 before making its final new low in H1 2016. US 10-year yield will trade above 3.0% and Bunds above 1.25%
  • Energy: WTI crude will hit US $70-80/barrel, setting up excellent energy returns.
  • US dollar will weaken to EUR1.18/1.20 before retest of lows and then start multi-year weakness.
  • Gold will be the best performer in commodity-led rally. We see 1425/35 by year-end.

Reading all these makes me wonder how stocks are managing to sustain at their highs ? I know there is not enough equity to go around, IPOs are not forthcoming in the developed world while share buybacks are eating up all the free float. The economic outlook should be rosy, if not bright, given all this wealth created in the equity space.

Folks should be out there spending their profits, no ? Yet, all we are getting is deflation these days which is good for stock markets because interest rates are expected to remain low.

I decided to drag out those retail sales growth charts.


People are not spending as much and retail sales look pretty exhausted. We need new toys ! because everyone has a smartphone and an iPad.

Perhaps the truth is found in the great wealth divide, that growing chasm between those with equity and those without like I mentioned before, that only 52% of Americans are vested in the stock markets and about 33% have less than US$1,000 in retirement savings.

And it does not help in the rapidly changing world of technology and robotisation which drives corporate profits up but wages down.


Capital spending is not growing because dividends and stock buybacks are the priority which makes sense ! because consumers are buying less anyway.

capital spending

So the conclusions are right afterall. We are heading for a recession like an “ocean liner without life boats” and market sentiments are manically complacent !

Asset prices are just inflating because of zero rates and only because of zero rates.

I am not sure if it is possible for the economy to suffer a sudden loss of confidence and even HSBC cannot pin point where a potential shock can arise. But we know the jitters are there, lurking behind every corner as volatility continues to batter at the markets daily and liquidity remains thin in the bond markets.

There is the suggestion of gold and commodities which I am beginning to favour, being physical assets with utility value unlike financial assets that includes real estate.

Because John Nash has proven that it is possible to have a lose-lose or win-win situation back in 1994. And if we do not start spending soon, then we better start thinking that everyone else is in the same boat.