A shifting global outlook

China was centre stage for investors this week amidst a flurry of activity from the leadership. We’ve already covered in some detail¹ the current plight of the Chinese economy. The deliberate popping of the property bubble to end all property bubbles still dominates the view.

Until this last week, China’s policymakers had opted for more surgical interventions, lots of thumbs jammed in multiplying leaks as such. However, alongside a number of monetary measures announced earlier in the week, there were heavy hints of more significant fiscal action in the pipeline.²

Chinese authorities have plenty on their plate already. The supply of workers is slowing sharply, thanks to an ageing population. The measured productivity of those workers has also been decelerating. Meanwhile, the returns on capital are low and investment to gross domestic product (GDP) ratios already suggest the economy is replete.³

This is clearly a very superficial skim through just some of the headwinds, which the incoming US election could easily add to. Nonetheless, this week’s market action confirmed that there is already quite a lot of doom and gloom incorporated into prices.

We maintain carefully curated exposure to the economy and region in deference to the range of potential outcomes in the path ahead. Our hunch remains that there is still more for policymakers to do, including bank recapitalisation. Nonetheless, it is important to keep an open mind on an economy so big, diverse, and poorly understood by many Western analysts.

US GDP revisions

This week saw some long-awaited revisions to US output data. These updates were for the second quarter, before the British ‘summer’ did its annual mayfly act. However, these were an important reminder of the difficulty of leaning too hard on the first iteration (or any) data on the economy.

One of the most popular tropes amongst the US economy doomers in recent months had been the savings ratio – the evolving proportion of personal savings within disposable income. This measure of household buffers was wafer thin relative to history, suggesting an economy on the edge.

However, amongst the revisions to this week was a sizeable upgrade to incomes. Suddenly the savings ratio no longer looks historically remarkable and a popular narrative for those looking for something to worry about is revised away. In the process, this meaty upgrade to the measured path of US household incomes also all but eradicated what had been a widening statistical chasm between the growth of incomes and spending.

The US economy still looks in impressive shape in aggregate. That is not to say it is unassailable. Of course it isn’t. However, we need to be wary of falling into the trap of treating it guilty until proved innocent. Leave that to the commentators trying not to look stupid. The opposite is the right stance for sensible investors in the context of an economy that continues to enjoy decent economic momentum.

Investment conclusion

Capital markets continue to provide a wild ride for those checking their statements on a regular basis. We know that share prices tend towards more volatility than is consistent with a pure efficient market’s framework.⁴ Meanwhile, we know that risk and volatility are not easily interchangeable terms in any case. When thinking about the actual risks to our investment returns, we are better off thinking about uncertainty.⁵

This allows us to sidle away from the unhelpful idea that the level of uncertainty that we are living through is gradable. By definition, we are always living through the same amount of uncertainty when it comes to the day/month/year ahead.

That may sound unwise with reference to our current moment. From impending US elections to various evolving tragedies around the world to a variety of wreckage in our rear-view mirror, we do seem to be living through volatile times.

However, the question we need to ask is whether this is useful information with reference to future uncertainty. The answer from history is to be wary of extrapolating views here. The past has not reliably predicted the future. For a start, this necessarily fails to recognise humanity’s capacity for course correction. Don’t look too much and have some faith in your fellow humans. They may surprise you positively.