I’m sorry for the delayed post – returned from vacation yesterday. The biggest items that stood out this past week are 1) that the IMF is projecting that Global GDP will decline in US dollar terms this year, 2) the implications of this for emerging markets, and 3) that central banks around the world are selling US government bonds at the fastest pace on record. I will also cover briefly what I think to be an inflection point in high tech stock valuations (at least in the short-to-medium term for private tech companies).
First, as covered by James Kynge and Valentina Romei in The Financial Times, despite improved economic conditions in the US, the struggles in emerging markets coupled with a strengthening US dollar “…is set to plunge the world into its first outright US dollar recession since 2009, according to the IMF.” Global growth forecast has been cut from 3.5% to 3.1%, but in USD terms, there will be negative global growth (a contraction of $2.7tn from 2014 – compared to a $3.3tn contraction in 2009, the steepest since records began in the early 1960s). While the U.S., China and India are projected to experience GDP growth this year, Brazil’s projected 2015 GDP in nominal dollar terms is set to contract 19.1%, and Russia by about 36%. Keep in mind desperate times lead to desperate measures, witness Putin’s aggression in Syria, Ukraine, Georgia, etc…
Second, and really an extension of the first point, in a follow up article by the Kynge and Romei two days later in The Financial Times, the IMF revised the projections to a fall in global GDP to $73.5tn in 2015, a $3.8tn fall from 2014, which would make it the largest annual decline in world growth since measurements began in the 1960s (in percentage terms this is a fall of 4.9% compared to a fall of 5.3% in 2009).
“Though the fall in US dollar GDP is primarily the product of an unusually strong dollar, it nevertheless helps to illuminate some important economic trends. It shows why some large multinational companies that calculate revenues in dollars but derive much of their business from emerging markets are suffering big earnings hits. It also helps explain why emerging market trade has been so weak this year.”
“A blended rate of reported results and estimates shows third-quarter revenue for companies in the S&P 500 with less than 50% of sales in the US fell 13% year over year compared with a rise of about 1% for those with more than half of sales in the US, according to FactSet.”
According to Charles Robertson, global chief economist at Renaissance Capital: “We expect external debt defaults to hit EM financials and corporates and higher import prices will feed into weaker domestic demand and hurt GDP.”
Third, as covered by Min Zeng and Lingling Wei in The Wall Street Journal, central banks around the world are selling US gov’t bonds at the fastest pace on record. China, Russia, Brazil, and Taiwan have ramped up their selling (all among the largest buyers previously). As a result, foreign official net sales of US Treasury debt maturing in at least a year hit $123bn in the 12 months ended in July (the biggest decline since data started to be collected in 1978). A year earlier, foreign central banks purchased $27bn of US notes and bonds and rose as high as a net $230bn for the year ended January 2013. If global economic conditions continue to deteriorate (particularly for commodity exporting economies), it is possible that the FED may not need to raise the base rate to attain higher rates (loose correlation). Rather, if central banks continue to drain their US government debt to shore up their own economies, rates may rise from the excess supply of reserves. As the analyst at Deutsche Bank describe it “quantitative tightening.”
Lastly, a topic that is top of mind due to my travels in the Bay area for vacation and attending the Urban Land Institute’s Fall Meeting where the effects of the tech boom were clearly on display via the built environment. Companies and developers have rationalized their space expansions and speculative offices as “recruitment tools” and are building excess space in expectation of growth needs. However, not all of these tech companies (the more than 100 unicorns – private companies with valuations in excess of $1bn – among them) will attain long-term success and the participants in the built environment risk similar outcomes to the last development/tech boom in the Bay Area. In the past week Mike Isaac of The New York Times reported that Twitter is opting out of a previously planned expansion of 100,000 SF across from its San Francisco headquarters and is going to reduce up to 8% of its employees (many of them engineers – the talent that is being so actively recruited). Subsequently, a former tech blue chip (Dell) that is struggling to evolve with the changing cloud landscape has announced that it is acquiring EMC and the investment world is starting to see that things may not be so rosy at Bio-tech darling Theranos. Be sure to read Michael Moritz’s, of Sequoia Capital, article in The Financial Times.
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