Matt King, credit products strategist at Citigroup, is really, really bearish on the global economy and, while I wouldn't recommend using his outlook as an investing template, the well-argued bear case provides an excellent chance for more optimistic investors to challenge their convictions.
Mr. King's most recent presentation is subtitled, "ever more liquidity, ever less impact." He argues not only that massive central bank monetary stimulus never significantly benefited the real economy, but that its effect on asset prices is now waning.
More specifically, quantitative easing and ultra-low interest rates did not lead to job-creating business investment as intended – the benefits remained trapped in the financial system. The idea was that low rates would motivate investment and hiring, and that newly hired workers would consume more, creating a virtuous upward economic cycle. Instead we got share buybacks.
Ever more liquidity, ever less impact
SOURCE: Scott Barlow/Bloomberg
After noting that QE programs have spread from the U.S. Federal Reserve to Europe and Japan, Mr. King writes that it is the "linkage between investment (or the lack of it) and all the stimulus which we find so disturbing. If the first $5-trillion of global QE, which saw corporate bond yields in both dollars and euros fall to all-time lows, didn't prompt a wave of investment, what do we think a sixth trillion is going to do?"
The strategist also points out that in the areas where capital expenditure did result from low rates – notably in commodities and technology – the economic gains were minimal. In the case of technology, companies like WhatsApp with a market cap of $19-billion (U.S.) and only 55 employees, the financial benefits stayed with the company founders. For commodities, crippling overcapacity and weaker prices mean layoffs are now rife as China's (monetary expansion-driven) demand slows.
The "how to invest" segment of Mr. King's unsettling presentation revolves around avoiding growth-related risk at all cost, as we might expect. This includes favouring developed markets (notably Europe) over emerging markets, and utilities and financials over industrial companies sensitive to global growth. Government bonds are a much better idea than corporate and high yield issues in this scenario and, although he did not state it outright, commodities would seem to be a "no fly zone" for investors.
This all sounds pretty awful, but there are also statistical rebuttals like the steady decline in U.S. initial jobless claims. European economic data, notably credit growth, have also pleasantly surprised the markets recently and do not seem to fit with Mr. King's outlook.
Nonetheless, investors should follow global markets carefully for signs that Matt King's outlook is accurate – and batten down the financial hatches if it is.
Follow Scott Barlow on Twitter @SBarlow_ROB.