Summary

In this call, Andrew Hunt discussed four of his key findings on the state of the global economy. He began by explaining how he believes that global liquidity peaked about three to four days prior to this group call. With his weekly monitoring of money and credit growth, Andrew highlighted how growth in liquidity has been an entirely public sector affair, with concurrent negligible private sector credit growth. He suggested that this growth is ending, and that due to the lack of private sector credit growth, he expects liquidity growth to slow from an annualised rate of around 12 - 14 per cent, to around 2 – 3 per cent.

Next, Andrew clarified why he thinks the first quarter of 2022 could resemble a global recession. He pinned this to what he described as a ‘global slowdown,’ in part caused by a slowdown in the Chinese economy. He suggested that the Chinese banking system is now incapable of growing at the rates that it has grown for the last 20 years. Andrew argued that China’s funding problem mirrors the general cause of all the emerging market crises he has covered, where balance sheet growth cannot be financed. In the case of China, he highlights how the Chinese banking system has hit the limit to its growth and is thus struggling to finance balance sheet growth. Andrew believes that, if China is not technically in a recession, in reality - it is remarkably close to one. He believes this pattern will persist into at least early 2022. On top of the Chinese slowdown, Andrew suggested that supply side disruptions, falling real incomes, and the potential threat from the coronavirus all contribute to this ‘global slowdown.’ Not least, he suggested that since the savings rate has not fallen as significantly as many spectators had predicted, he expects growth in GDP to be weaker. Additionally, Andrew highlighted how in the US debt is compounding at a faster rate than nominal GDP and incomes, encouraging people and companies to be more conservative with their spending, further impeding growth.

Following this, Andrew explored why he thinks inflation will come down temporarily in the West and will disappear semi-permanently (potentially creating deflation) in the East. In the West, Andrew suggests that it is very probable that we will see a panicky reactive policy easing in the second half of 2022 in response to inflation and the population’s desire for compensation for their falling real incomes. However, he suggests that this easing will more likely generate inflation than a recovery. In the East, Andrew believes the Japanification of China’s banking system will constrain growth over the medium term, and given China’s level of debt, he believes it is possible that within a year’s time China will appear deflationary internally, which will reflect in other countries and China’s trading partners.

Finally, Andrew detailed a handful of special situations occurring across the globe. The first of these situations, he explained, is the shifting centre of competitiveness in the Eurozone from Northwest Europe to the South. He suggested that the South could experience a period of rapid growth, highlighted, for example, by Italy’s recently improved balance of payments, and its repayment of some of its target two loans – which Andrew would not normally expect. He also suggested that superior growth is likely to occur in countries like Spain and Italy compared to their North-Western counterparts in the coming years. On the other hand, Andrew argued that the UK is proving worryingly successful at dismantling its low value-added parts of its economy, and less successful at generating growth in the high value-added parts. These factors, in tandem with the lack of supply side reform, supply side disruptions that have been caused by COVID and Brexit, and its ‘miserable’ debt arithmetic, cause Andrew to take a pessimistic outlook on the United Kingdom at present. Finally, Andrew noted how he expects equities to struggle in the near term, forecasting that if there is an inflationary policy easing by Western policymakers, bonds will become de-rated, and shortly after, so too will equities.

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