Easy Money Ending, Now for Hard Graft for Growth

The macro story that has driven global markets including Zambia since 2008’s financial crisis is central bank monetary easing. Yesterday was a reminder that the dog wagging the tail of the global economy was Ben Bernanke, Chairman of the U.S. Federal Reserve. As expected, he and his Fed colleagues were being aggressively hawkish against expectations and succeeded in reopening many of this past month’s asset class price wounds.

This is the beginning of the end to easy money that has floated global asset prices and enabled cheap debt for governments and companies. Now attention shifts to the hard work and ideas that are needed to drive growth. These are the new fundamentals. But first, some uncertain structural adjustment is needed.

It used to be that bad news was good news as it meant more QE. The Fed improved communications this time with lengthy explanations that were unsettling if direct yet good news was interpreted as bad news. This time they were taken to mean no QE.

Good News Is Bad News

The good news is that the US economy is growing faster than predicted with below 2% target inflation and decreasing unemployment since late last year. This news should have rallied the markets. Instead, it frightened them from Asia to Europe to the US.

The communiqué of the Federal Open Market Committee (FOMC) and Bernanke’s press conference delivered its ‘tapering’ message loud and clear – it is on the table for Q4 2013 possibly ending mid 2014 when the unemployment rate is expected to be 7%.

Bernanke struck an optimistic tone, saying “the downside risks to the outlook for the economy and the labour market have diminished”. But he added that the pace of any tapering would depend on the data.

This tapering is not tightening. The Fed is not poised to raise rates anytime soon until 2014-15, but assuming key data keeps improving, it will trim its monthly $85 billion bond purchase starting later this year. That precise message succeeded in pushing US Treasury yields to reach 15-month highs, in-turn allowing the mighty dollar to rule the roost once again. Stock markets plunged.

We should say that Fed policy is “data dependent”. It may vary as stats emerge – on employment, inflation and economic growth. Bernanke stated, “If the subsequent data remain broadly aligned with our current expectations for the economy, we would continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around midyear”.

In his press conference he was at pains to say that the Fed would not be selling its stock of treasuries and mortgage-backed securities. The stock would simply be rotated and re-invested, which he viewed as an accommodative policy.

Good Euronews Hits Euro

Latest upbeat European PMIs are giving the 17-member single currency little solace. With the Fed dominating market direction, the better-than-expected PMI from France, Germany, and the entire

Eurozone has been drowned out, discounted, and ignored. Anxiety, mass liquidation, and margin requirements are forcing G10 currencies to test some key support levels as US yields push the USD to the top of the pile. Even powerful Germany, the Eurozone’s economic backbone, is unable to help with its expanding business activity for this month. The EUR, along with the other major currencies, are being exposed to key technical levels.

European stocks also had their worst day for 19 months.

The markets can expect further significant angst as traders and investors try to make sense of the Fed’s words.

Commodities and Currencies under the Dollar Hammer

Oil prices dropped after weak China data sparked concerns over demand. Brent crude, the global benchmark, is 2% lower at $104.10 a barrel and prices fell another 3% today. Even WTI crude was hit despite rosy growth outlook for the US.

Meanwhile, the rise in the dollar has also sent precious metals prices tumbling. Gold, which has traditionally been seen as a haven in times of market turmoil, falls 3.7 per cent to $1,301.15 an ounce a 2½ year low, while silver tumbles 6 per cent to $20 an ounce. Copper dropped below $7,000 on LME.

The dollar rose against all major currencies with the strongest gains being seen against the Japanese yen and emerging markets. That led to further pain for currencies such as the Indian rupee, which has hit a fresh record low with the dollar rising 2 per cent to trade just under Rs60 against the dollar. The euro fell 0.8 per cent against the dollar to $1.3192 while the US currency gained 1.4 per cent versus the yen to Y97.83. The kwacha took a wild ride ending down 0.8% at k5,475 at the mid rate on 20^th June.

And Now for Hard Work and New Ideas

Bernanke has signalled the beginning of the end to easy money. Debt is becoming more expensive.

Now attention moves to fundamentals. World governments, agencies and companies must now focus on growth and the hard work and new ideas that lead to it.  Funding growth in the new post-QE dearer money will demand better ideas and smarter execution delivering re-investable returns. This is no quick fix.

The strong dollar and search for yields favour growing, lower risk developed markets such as the US. This will test emerging markets the most and frontier markets even more.

Once upon a time pre-crisis emerging markets were seen as high growth. Now BRICS and other emerging markets are slow growing or slower growing. Africa on the other hand has 7 of the 10 fastest growing economies from a low base according to analysts.

New Idea for African Growth

Yesterday saw the UN promote “commodity-based industrialisation”, which means more local value addition in vertical industries especially in extractive, energy and agriculture sectors. This growth strategy requires “a strategic plan and delivery that puts in place the right policies and institutional changes, backed by prioritised investments” says the UN. Zambia was amongst nine countries that provided primary data.

The UN’s Economic Report on Africa 2013 calls for interventionist state policies and continental initiatives as well as infrastructure improvements to boost supply chain linkages.

The African Development Bank points out that much needs to be done to competitiveness of the continent for a commodity-based industrialisation policy to succeed.

Indeed this brings us full circle to focus on the fundamentals of ideas and hard work be they in planning, funding or execution. The era of easy money is over.

David Ryder MA MBA

Consultant. Commentator. Entrepreneur.

www.Viewonzambia.blogspot.com