February, 24 2017 by lsr team

Jonathan Fenby sets out 12 reasons why China feels good: 1. China’s economy is ticking over on a cyclical reflation path with sharp PPI recovery coming through.
2. Though it will get worse in absolute terms, the debt problem has been diffused for now by shifting it away from banks and local governments.
3. Currency outflows have moderated for the time being. The housing sector is heading for a correction not a meltdown.
4. Preparations for the Communist Party Congress in late 2017 seem to be on track with no challenge to Xi as he moves into his...

June, 09 2016 by lsr team

The RBA kept the cash rate at 1.75% following last month’s 25 basis point cut, signalling a wait-and-see stance is appropriate as the economy reaches an inflexion point. Real GDP jumped 1.1% q/q in Q1, taking the annual rate of growth above 3%. However, this positive GDP surprise failed to impress investors. Gains in yields, equities and the AUD on the news proved short-lived, confirming the market’s recognition that the glass looks half-empty for Australia’s economy.. Click above to watch the full video.

June, 08 2016 by lsr team

The housing market has long played a central role in discussions about secular stagnation in the US. This is hardly surprising given it was the collapse in American house prices that brought so much destruction in 2008. Credit was tight, job/income prospects were poor, would–be homebuyers had reassessed potential long-term capital gains and there was a substantial overhang of unsold homes/foreclosures. An intense and long-lasting squeeze on housing investment explained why the economy had failed to bounce back as quickly as in previous recessions.   Since...

April, 15 2016 by lsr team

Investor sentiment has started to perk up recently on the back of a series of strong data. With exports popping almost 20% year on year in March, heavily distorted by the Chinese New Year, a local journalist has asked if a U-shaped recovery in the economy was on the cards. Unfortunately, we are just at the beginning of yet another mini-cycle of the sort we have been through over the past couple of years. On our preliminary estimate, Chinese GDP expanded 7.1% at an annualised rate in Q1. That is up from 5.5% in Q4 and is the fastest pace in almost two years. What is the m...

March, 22 2016 by lsr team

Households have been borrowing more and saving less, suggesting their finances are increasingly vulnerable to shocks – not least in view of stretched property market conditions. This is a topic that was repeatedly raised during out recent visits to Australian clients. Spurred by easy monetary policy and a buoyant property market, the leverage of households –predominantly mortgages- has risen to a record 1.8 times income. At the same time, their savings ratio has been declining through the RBA’s extended easing cycle, raising questions about the robustne...

February, 17 2016 by lsr team

Beijing has pledged to embark on the necessary reforms to lower debt levels in the economy. Yet the latest money and credit numbers show that Chinese banks expanded their loan books at a record pace at the start of 2016. In January, Chinese banks extended a whopping RMB2.5 trillion in new loans, or 4% of GDP. On a seasonally adjusted basis, RMB 1.6 trillion new loans were extended. Given that local government bond issuance has come to a halt ahead of a new debt swap programme, local government financing companies might have taken out bridge loans from banks to refinance...

February, 09 2016 by lsr team

Ironically, financial market turbulence has hit just as the world economy’s chances of rebalancing successfully had increased. We published our year ahead piece in early December with the title “Don’t panic!”, but investors returned to work after the holidays worried about China’s slowdown, collapsing oil prices, global debt unwinding and the dearth of policy options left open to leading central banks. Widespread anxiety pulled the rug from under asset prices. As is our tradition, we asked our clients in mid- January for their top questions...

January, 29 2016 by lsr team

Both the UK and the US are relying on consumers to power recovery. But while British households have largely shaken off the after-crisis blues, their US counterparts seem to be suffering from a case of Post-Traumatic Stress Disorder caused by past job and home losses. The difference is clearest in the savings rate. In both economies, there is a strong historical relationship between wealth and savings. However, whereas American consumers are currently saving more than their wealth ratios would suggest, UK consumers are setting aside less. What has driven this divergence?...

January, 11 2016 by lsr team

The stock market is fixated on China, as the deep convictions of the China bulls are progressively and painfully eviscerated. But their inability until recently to see the flaws in China’s post-crisis recovery is fomenting a new delusion: that China’s slowdown, and stock-market angst, will necessarily pull down the rest of the world’s economies and stock markets. In other words, the obsession with China has taken on a new form rather than faded, as it should have done: China is clearly important, but it is not all-important. Click below to find out how...

December, 09 2015 by lsr team

Twelve months ago we said 2015 would be a year of ‘deceptive calm’. With the S&P 500 up 5% and US 10-year yields around 5bps higher, you could say our forecast was accurate. Markets spent much of the year in an anxious state, fretting about Greece, then China, then the risk of a synchronised global recession. In 2006 and 2007, LSR had a high conviction that a financial meltdown was about to wreak havoc on the global economy. This time around we stick with our 2015 theme ‘Keep Dancing’ but with no great conviction. Looking ahead to 2016, China...

November, 25 2015 by lsr team

Last week we published our LSR View explaining why US growth is likely to accelerate into 2016 and that, by inference, recent scares about the potential for a US recession are greatly overplayed. We think US real GDP growth is set to quicken to 2½ -3% from the 2% average of the past five years. This exceeds most current estimates of US growth potential and fully justifies the Federal Reserve’s expected rate increases. Rapidly growing household spending, on housing as well as consumption, plus an end to five years of fiscal drag will be the main engines of gr...