And, against this backdrop markets seem content to lurch from one wall of worry to another: a hard Brexit, a hard landing in China, the capitulation of European banks and even a Trump presidency.
In short, doom and gloom is the obvious angle, which is why Portfolio Adviser thought it would try a thought exercise: what if the world doesn’t go up in flames? What if, instead of capitulating, China chugs along. What if Deutsche Bank has its wrist firmly slapped instead of the financial rug pulled from under it, where does that leave the world and investors?
As was proved by the EU referendum it is impossible to predict exactly what is going to happen. But, if one assumes that the sky isn’t going to fall, then some of the data out in the last few days is rather encouraging.
If one leaves aside the prospect of a gargantuan fine, the results for the third quarter were, in the words of Goldman Sachs analysts quoted by the Financial Times, “constructive”, with the global markets business, in particular, being held up as positive.
There is no doubt that the banking sector continues to struggle in the extremely low interest rate environment, as was evidenced by yesterday’s numbers by Lloyds, but the results out from both Deutsche Bank and Barclays on Thursday were better than many expected them to be.
"Doom and gloom is the obvious angle, but what if the world doesn’t go up in flames?"
And, while one cannot ignore the $14bn elephant in the room, a strong case can be made that it is in neither the US nor Germany’s interests for the Department of Justice to levy such a large fine.
The flight path for China from here is as polarising a topic as the banking sector, and there are cogent arguments on both sides. The country has saddled itself with an enormous level of debt and the unwinding of that credit expansion has the potential to be painful. Likewise, house prices have risen sharply, leading some to speculate that it too could come crashing down.
In a note out on Wednesday, helpfully titled, What if the sky isn’t falling, Matthews Asia’s Andy Rothman points out that, while he agrees that debt is a worry, the majority of those debts are to state-owned firms, “while the privately owned companies that employ the majority of the workforce and account for the majority of economic growth have been deleveraging”.
“Cleaning up China’s debt problem will be expensive, but this process is likely to result in gradually slower economic growth rates, greater volatility, and a higher fiscal deficit/GDP ratio, not the dramatic hard landing or banking crisis scenarios that make for a sexier media story,” he said.
In terms of the housing market, here too, Rothman is unconvinced that a crisis is in the offing.
“In my view, bubbles are all about leverage, and the main reason China doesn’t have to worry about a housing bubble is cash. The minimum cash down payment for a mortgage for a primary residence is 20% of the purchase price, and most banks tell us they require 30%. This is far from the 2% median cash down payment in the U.S. in 2006, which was the primary cause of the financial crisis here. While there are lots of rumours about homebuyers using P2P loans to make their down payments, this isn’t supported by evidence, and seems unlikely to be occurring on a large scale, given the very high interest rates for P2P loans and the very small scale of total P2P loans,” he said.