WEBVTT - Kopi Time E138 - IMF Notes; Economic Resiliency and Financial Risks 0:00:05.900 --> 0:00:08.738 Welcome to Copy Time, a podcast series on Markets and 0:00:08.750 --> 0:00:11.939 Economies from D BS Group Research. I'm the chief economist, 0:00:11.949 --> 0:00:17.149 welcoming you to our 138th episode and I will apologize 0:00:17.159 --> 0:00:20.308 in advance for the sound quality and the likely sirens 0:00:20.319 --> 0:00:22.459 of New York City, police cars and fire engines in 0:00:22.469 --> 0:00:26.620 the background. So here goes the animal meetings of the 0:00:26.629 --> 0:00:26.909 IMF 0:00:27.155 --> 0:00:29.864 and the World Bank held at Washington DC last week. 0:00:30.055 --> 0:00:35.424 We're characterized by relief over global economic resiliency. Juxtaposed by 0:00:35.435 --> 0:00:39.314 heightened concerns about a variety of risks. There was an 0:00:39.325 --> 0:00:44.235 element of satisfaction among developed and emerging market. Government officials 0:00:44.444 --> 0:00:48.014 that the post pandemic rebounded. Inflation has largely abated 0:00:48.418 --> 0:00:52.020 and the short interest rate increase phase has come and 0:00:52.029 --> 0:00:55.319 gone without causing economic growth to stumble around the world. 0:00:55.700 --> 0:00:58.200 This is a sharp departure from the case just two 0:00:58.209 --> 0:01:01.860 years ago when there was near panic about the stickiness 0:01:01.869 --> 0:01:05.190 of inflation and the likely spike in unemployment that would 0:01:05.199 --> 0:01:07.720 be caused by necessary monetary policy tightening. 0:01:08.349 --> 0:01:10.529 It has of course turned out to be quite different. 0:01:10.830 --> 0:01:14.489 Labor markets have barely loosened and asset markets are buoyant 0:01:14.620 --> 0:01:17.330 while goods inflation has disappeared considerably. 0:01:17.980 --> 0:01:21.589 China, a major source of commodity demand has been on 0:01:21.599 --> 0:01:24.929 a slowing path. A contrast from the US economy which 0:01:24.940 --> 0:01:28.900 has been going strength to strength this opposing dynamic has 0:01:28.910 --> 0:01:32.839 offered a degree of balance to the global supply demand picture. 0:01:32.849 --> 0:01:36.878 A stable commodity price environment. Despite escalating warfare in the 0:01:36.889 --> 0:01:39.660 Middle East has also been a source of support 0:01:39.940 --> 0:01:43.930 global and ASEAN five growth is expected to remain stable 0:01:43.940 --> 0:01:48.059 between 24 and 25 in the ifs world economic outlook 0:01:48.069 --> 0:01:52.150 forecasts released during the meetings. Global real GDP is expected 0:01:52.160 --> 0:01:56.970 to rise by 3.2% in both 2024 and 2025. While 0:01:57.230 --> 0:02:00.989 ASEAN five is expected to rise by about 4.5% in 0:02:01.000 --> 0:02:01.660 both years. 0:02:02.300 --> 0:02:05.959 Some slowing of China and India's economies could be also 0:02:05.970 --> 0:02:11.059 in store about 50 bips each from 4.8 and 7% respectively. 0:02:11.250 --> 0:02:15.279 But overall global consumption and investment would chug along as 0:02:15.288 --> 0:02:18.360 part of the IMF we think that it may be 0:02:18.369 --> 0:02:22.350 too early to declare victory over inflation or take comfort 0:02:22.360 --> 0:02:26.600 in the apparent resiliency from higher rates. Services inflation remain 0:02:26.610 --> 0:02:27.960 on the sticky side. 0:02:28.220 --> 0:02:32.619 Strong growth may spill over onto or into higher prices 0:02:32.949 --> 0:02:35.339 and the tensions in the Middle East could reach a 0:02:35.350 --> 0:02:39.910 tipping point already in recent weeks. The overwhelming expectations of 0:02:39.919 --> 0:02:44.119 sustained rate cuts have begun to recede with a great 0:02:44.130 --> 0:02:46.750 deal of uncertainty building up over how many rate cuts 0:02:46.758 --> 0:02:48.160 are possible next year. 0:02:48.820 --> 0:02:52.429 One or two more strong jobs than birds and higher 0:02:52.440 --> 0:02:56.029 than expected. CP I prints could cause a sharp change 0:02:56.038 --> 0:02:57.758 in rates pricing for next year. 0:02:58.699 --> 0:03:01.960 The recent rise in long term US, interest rates which 0:03:01.970 --> 0:03:04.869 has resulted in mortgage rates rising as well could be 0:03:04.880 --> 0:03:09.008 a harbinger for things to come. Higher rates could also 0:03:09.020 --> 0:03:13.919 materialize under Trump election presidency or Trump election victory, which 0:03:13.929 --> 0:03:17.119 could lead to the expectations of higher us fiscal deficit 0:03:17.339 --> 0:03:22.258 and erosion of fed independence. That plus Trump's tariff plans 0:03:22.270 --> 0:03:25.240 could lead to forming of the US D hurting some 0:03:25.250 --> 0:03:28.080 US D borrowing sovereigns, firms and households. 0:03:28.460 --> 0:03:31.000 These risks will need to be assessed in light of 0:03:31.008 --> 0:03:33.720 the result of the November Us presidential elections. 0:03:34.699 --> 0:03:38.199 There was no shortage of concerns over the US ranging 0:03:38.210 --> 0:03:42.449 from an increasingly untenable fiscal position impact of higher tariffs 0:03:42.460 --> 0:03:45.580 on the rest of the world and to Americans and 0:03:45.589 --> 0:03:49.550 a possible re acceleration and inflation. Under a no landing scenario, 0:03:50.429 --> 0:03:55.039 we even heard ideas akin to an eu style border 0:03:55.050 --> 0:03:58.690 carbon adjustment tax on imports being floated by some Trump 0:03:58.699 --> 0:04:03.729 loyalists while such things are less likely under a Harris presidency. 0:04:04.059 --> 0:04:07.740 No one that I met expects a meaningful improvement in 0:04:07.750 --> 0:04:10.660 the frictions, characterizing us, trade and commerce vis a vis 0:04:10.669 --> 0:04:11.570 the rest of the world. 0:04:12.860 --> 0:04:15.410 There was however some degree of comfort with the US 0:04:15.419 --> 0:04:20.170 outlook among many actually given the strong state of asset markets, 0:04:20.178 --> 0:04:24.010 a buoyant investment environment commanding lead of the global A 0:04:24.019 --> 0:04:28.279 I race and sell corporate and household balance sheets. 0:04:29.079 --> 0:04:32.109 As has been the case lately, the meetings contained a 0:04:32.119 --> 0:04:36.368 great deal of discussion and presentations on geo economic fragmentation, 0:04:36.470 --> 0:04:39.969 climate finance. And of course China from the so called 0:04:39.980 --> 0:04:44.290 excess capacity charges to the scale and effectiveness of the 0:04:44.299 --> 0:04:49.760 ongoing stimulus measures from the security environment, external, internal to 0:04:49.769 --> 0:04:54.700 the China plus one dynamic. The arguments were unfortunately largely binary. 0:04:55.269 --> 0:04:58.010 There is a great deal of group thing among DM 0:04:58.019 --> 0:05:02.269 economies about China and the thinking is largely about threats 0:05:02.279 --> 0:05:06.519 and risks rather than opportunities and gains from cooper operation. 0:05:07.059 --> 0:05:10.649 We expect this polarization to persist with more tariffs and 0:05:10.660 --> 0:05:14.070 other restrictive measures in the pipeline. The key is to 0:05:14.079 --> 0:05:17.809 do the best given that inevitable and adverse dynamic. 0:05:18.920 --> 0:05:22.989 This is where opportunities for em are being seen. Supply 0:05:23.000 --> 0:05:26.909 chain relocation should help the likes of India, Mexico, Southeast 0:05:26.920 --> 0:05:30.540 Asia and a few other countries. Investments from Western MN 0:05:30.549 --> 0:05:33.450 CS as well as from Chinese companies are being spread 0:05:33.459 --> 0:05:34.720 more widely around the world. 0:05:35.510 --> 0:05:38.649 It remains to be seen if this relocation process would 0:05:38.660 --> 0:05:41.399 take place without a drop in productivity displayed by China's 0:05:41.410 --> 0:05:45.709 manufacturing stack. But the choices to do so have been made, 0:05:46.019 --> 0:05:47.140 no doubt about that. 0:05:48.070 --> 0:05:50.670 Authorization of the US dollar was another widely discussed. The 0:05:51.380 --> 0:05:54.390 surveys show that central banks are increasingly inclined to hold 0:05:54.399 --> 0:05:58.940 more gold and non US dollar assets. Fintech solutions make 0:05:58.950 --> 0:06:03.540 deferred barter feasible under which countries running trade deficits. Vis 0:06:03.570 --> 0:06:06.890 A vis China can receive RMB for what they sell 0:06:06.899 --> 0:06:10.709 to China and send those RMB proceeds back through the 0:06:10.720 --> 0:06:11.549 import channel. 0:06:11.910 --> 0:06:15.829 This is not a theoretical construct. It is an increasingly 0:06:15.839 --> 0:06:18.169 deepening phenomenon, especially in the Middle East. 0:06:19.619 --> 0:06:23.390 There are reasons for this US eu efforts to seize 0:06:23.399 --> 0:06:25.970 or freeze the assets of the central banks of Afghanistan 0:06:25.980 --> 0:06:29.260 and Russia along with the multitude of restrictions over Western 0:06:29.269 --> 0:06:32.959 payment systems like swift are adding impetus for many governments 0:06:32.970 --> 0:06:34.920 to reduce our reliance on the US dollar. 0:06:35.619 --> 0:06:38.678 There are already cases where central banks are repatriating their 0:06:38.690 --> 0:06:42.880 gold reserves custody from London, New York to their home jurisdictions. 0:06:43.690 --> 0:06:47.029 Now reducing the reliance on the US dollar is akin 0:06:47.040 --> 0:06:50.380 to the de risking of supply chain strategy that is 0:06:50.390 --> 0:06:53.630 touted a great deal just like the pandemic, pushed companies 0:06:53.640 --> 0:06:58.029 to reconsider the efficiency, resiliency, trade off over loads of manufacturing. 0:06:58.209 --> 0:07:01.429 Similar considerations are at play with regard to the risks 0:07:01.440 --> 0:07:02.950 of holding us dollar assets. 0:07:03.450 --> 0:07:08.160 Alternatives like barter purchase and localization of gold holdings and 0:07:08.170 --> 0:07:13.850 adding Euro or RMB to reserves are somewhat second best options. 0:07:13.859 --> 0:07:17.040 They have some associated frictions but they are now very 0:07:17.049 --> 0:07:20.589 much on the table. The extraordinary rise in US debt 0:07:20.600 --> 0:07:24.359 issuance adds to these considerations in many corners of the world. 0:07:25.329 --> 0:07:28.119 All right, I'm gonna switch gears a little bit and 0:07:28.130 --> 0:07:31.390 I want to talk about a specific chapter that was 0:07:31.399 --> 0:07:35.489 published by the IMF uh it was the um IMF 0:07:35.500 --> 0:07:39.109 Global Financial Stability Report or GFSR and it contained a 0:07:39.119 --> 0:07:43.170 very interesting chapter on the potential impact of A I 0:07:43.179 --> 0:07:45.109 and Ja I on capital markets. 0:07:45.920 --> 0:07:48.329 The premise of the analysis was that A I and 0:07:48.339 --> 0:07:51.450 related breakthroughs have the potential to increase the efficiency of 0:07:51.459 --> 0:07:55.049 capital markets and that includes trading investment and asset allocation 0:07:55.290 --> 0:07:59.579 through assisted process automation and analysis of complex unstructured data. 0:08:00.399 --> 0:08:04.649 The report cited early evidence that these effects are already 0:08:04.660 --> 0:08:08.040 being felt in the financial sector. Financial firms are hiring 0:08:08.049 --> 0:08:10.970 a large number of A I talent developers are filing 0:08:10.980 --> 0:08:15.519 for patterns and these are up sharply. While pricing patterns 0:08:15.529 --> 0:08:18.958 and trading dynamics already show changes in some markets. Consistent 0:08:18.970 --> 0:08:23.040 with the adoption of these new technologies, major gains from 0:08:23.049 --> 0:08:25.829 such a wave would materialize in the medium term for 0:08:25.839 --> 0:08:26.579 the time being. 0:08:26.829 --> 0:08:29.420 The typical short term use case for A I is 0:08:29.429 --> 0:08:33.289 extension of existing trends in the use of machine learning 0:08:33.349 --> 0:08:35.489 and other advanced analytical tools. 0:08:36.299 --> 0:08:40.239 The IMF researchers argue in the report that A I 0:08:40.249 --> 0:08:44.718 may reduce financial stability risks by enabling superior risk management, 0:08:44.729 --> 0:08:49.148 deepening market liquidity and improving market monitoring, but it's not 0:08:49.158 --> 0:08:54.039 all good. There are some risks to consider. Firstly, um 0:08:54.049 --> 0:08:57.439 the risk is if trading strategies of A I models 0:08:57.448 --> 0:09:00.218 all respond to a shock in a similar manner, then 0:09:00.229 --> 0:09:03.439 that could create exaggerated price movements or market disruption. 0:09:04.289 --> 0:09:07.390 Also, there could be further migration of market making and 0:09:07.400 --> 0:09:10.799 investments activities to hedge funds for priory trading firms and 0:09:10.809 --> 0:09:14.549 other non bank financial intermediaries, which could create a degree 0:09:14.559 --> 0:09:17.229 of opacity in the financial sector, 0:09:18.020 --> 0:09:21.229 firms and government should also take into cognizance the increase 0:09:21.239 --> 0:09:23.880 in operational risks as there are only a handful of 0:09:23.890 --> 0:09:27.039 key third party A I service producers. There's also the 0:09:27.049 --> 0:09:29.988 risk that A I enabled bad actors could carry out 0:09:30.000 --> 0:09:33.830 cyber attacks and market manipulation with a far greater potency 0:09:33.840 --> 0:09:35.239 than anything we have seen. So far. 0:09:36.940 --> 0:09:40.400 Global regulators are working on creating a framework to address this. 0:09:40.409 --> 0:09:45.080 These risks considerations include calibration of circuit breakers and a 0:09:45.090 --> 0:09:47.880 review of marketing practices. In case of rapid A I 0:09:47.890 --> 0:09:50.929 driven price moves as well as enhanced monitoring and data 0:09:50.940 --> 0:09:54.109 collection of the activity of large traders including non bad 0:09:54.119 --> 0:09:55.309 financial intermediaries. 0:09:56.109 --> 0:09:58.729 There will be an increased need to stay on top 0:09:58.739 --> 0:10:03.130 of dependency on data models and technological infrastructure firms should 0:10:03.140 --> 0:10:07.869 be expecting to regulators, expecting regulators to demand risk mapping 0:10:08.140 --> 0:10:11.719 covering internal external data, interconnections and interdependencies. 0:10:12.640 --> 0:10:16.270 So in conclusion, the IMF meetings did not bring forth 0:10:16.280 --> 0:10:20.589 any new ambitious calls to action. Key cyclical and structural 0:10:20.599 --> 0:10:23.659 issues remain the same from sustainable growth to dealing with 0:10:23.669 --> 0:10:27.669 climate change, to issues like increasing the voice of developing 0:10:27.679 --> 0:10:31.510 economies in the multilateral system remain on the sideline. The 0:10:31.520 --> 0:10:35.400 continuous erosion of a rules based free trade oriented global 0:10:35.409 --> 0:10:39.739 system is noted and those costs are highlighted 0:10:40.090 --> 0:10:42.109 but there is little in the power of the well 0:10:42.119 --> 0:10:44.829 meaning staff of the World Bank and IMF to push 0:10:44.840 --> 0:10:45.909 back against the trend 0:10:47.059 --> 0:10:49.809 in the coming meetings. More of the same can be 0:10:49.820 --> 0:10:52.690 expected and that's just about it. 0:10:53.190 --> 0:10:55.940 So that's it for today. Copy Time was produced by 0:10:55.950 --> 0:10:58.848 Ken Delbridge from Spy studios, Violet Lee and Daisy Shermer 0:10:58.859 --> 0:11:03.118 provided additional assistance. This podcast is for information only and 0:11:03.130 --> 0:11:06.989 does not provide any trade recommendations. All 138 episodes of 0:11:07.000 --> 0:11:09.439 copy time are available on youtube as well as on 0:11:09.450 --> 0:11:14.250 all major platforms of podcasts including Apple and Spotify. As 0:11:14.260 --> 0:11:16.880 for our research publications and webinars. You can find them 0:11:16.890 --> 0:11:20.409 all by Googling D BS Research Library. Have a great day.