The article first appeared in The Australian Financial Review at this link: 


Why I’m betting $10,000 that the RBS uber-bears have got it all wrong

The US economy is creating jobs at a rapid pace, GDP growth is around 2.5 per cent and inflation is starting to edge up. In the eurozone, the tentative economic expansion has been sufficiently strong to see the unemployment rate fall to a four year low and business confidence is on rise. These are very positive aspects for the global economy as the depths of the global crisis in 2008 to 2010 slowly but surely fade.

It is not all good news for global growth and there is a problem, quite clearly, with China’s economy still adjusting to some of the prior excesses and the substantial spare capacity that resulted. In recent weeks, it has been the downside economic risks and policy malaise in China that has driven most market ructions, with commodity and stock market prices falling appreciably. A glut of oil supply has not helped matters.

This round of bad news has emboldened the gloomiest of market analysts to publish a plethora of particularly pessimistic forecasts, with the now infamous “sell everything” report by Andrew Roberts from RBS at the pinnacle of the pessimism. Société Générale global strategist Albert Edwards is also getting huge coverage with his forecast for US stocks to fall around 65 per cent during 2016.

In recent weeks, with stock prices falling, the Chinese economy spluttering and commodity prices hitting multi-year lows, these mega-gloomy predictions are gaining coverage and followers.
The more realistic outlook for the economy and markets needs to take account of macroeconomic conditions – the good news in the US and eurozone – and the policy pragmatism that will prevail if economic conditions deteriorate.

Taking the US Federal Reserve and its monetary policy task as an example, its members are planning to hike interest rates by approximately 1 percentage point during 2016. This projection is based on economic growth of 2.4 per cent, the unemployment rate edging lower to 4.7 per cent and inflation accelerating to 1.6 per cent with further increases in 2017 and 2018.

If for whatever reason, including those outlined by Roberts and Edwards, these projection are wrong to the downside, the Fed will recast its policy outlook and it would not be hiking interest rates by 1 per cent. If things are significantly weaker, the pragmatism of the Fed would show up in a cut interest rates and in a worst case, a reversion to quantitative easing. In other words, if the economy looks like crashing into the proverbial brick wall, the Fed will change policy direction to ensure it either does not happen or that the severity of the downturn is reduced.

In terms of the current problem child of the global economy, China, the adjustment to past excess stimulus will take some time to play out. One only has to look at the recent trends in commodity prices to confirm the fact that the China has slowed, perhaps markedly, as part of that adjustment. Everyone and their dog have correctly been downgrading the Chinese growth outlook for some time but we are now at the point that the downgrades risk being most acute at or near the bottom of the cycle. The authorities in China want their economy to grow and will not sit idly by if the current weakness threatens to morph into a recession. Hence the recent policies to devalue the Yuan and trim interest rates.

It appears that Roberts and Edwards are always pessimistic on markets and the economy having forecast global depression and ongoing stock markets falls. They are the so-called ‘perma-bears’ who scour the data for information that supports their view. This, of course, means that when the business cycle inevitably has a downturn, they look like geniuses, heroes and insightful gurus.

They should also be held account for their views when economic growth is sustained and asset prices rise.
These are some of the reasons I asked Mr Roberts to put his money where his mouth is with a $10,000 challenge on 11 economic and market indicators that embrace his particularly gloomy view. If he is correct, the price of various stock markets, house prices and commodities will track lower through 2016. If he is wrong, they will move higher, quite plainly.

Mr Roberts has not yet responded to my challenge. The recent market ructions has him ahead on most of the 11 indicators, yet he seems reluctant, like many analysts, to back up their headline grabbing forecasts by putting their own money where their mouth is.