In recent years, George Magnus, UBS’s senior economic advisor, has garnered a reputation as a prescient bear after warning the global credit cycle was poised for sharp downward cycle in a series of papers released 12 days before the collapse of Lehman Brothers in 2008. More recently, Magnus has warned that structural global monetary imbalances show no sign of abating while the ECB’s long-term repurchase operations (LTROs) are unlikely to kick-start bank lending while contributing to reform fatigue in Spain.
Given this, it came as something of a surprise when we found a research note detailing two positive surprises that challenged Magnus’s bearish positions on the outlook for the US economy.
In a conference call on Monday with UBS economists, Magnus isolated two factors that could prove positive for the US economy and dollar-denominated assets in the medium to long-term. First, Magnus is bullish on technological developments in the US shale gas industry that would reshape America’s long-term energy supplies, transform its balance-of-payments position and, with it, boost the dollar. In his words:
| I am conscious of a couple of things that have caught my eye, especially over the turn of the year, that are actually quite positive for the US and for US dollar assets over the medium to longer term, and here I would just like to deviate for a moment away from some of the higher-frequency stuff we digest incessantly. The first thing that jumped out was a December 2011 report on Reuters about environmental health scares associated with hydraulic fracturing, which I had never heard of but which, of course, we all know now as “fracking”, which is really all about shale gas deposits that could yield copious amounts of gas. A quick search at the Energy Information Agency’s website revealed that shale gas production has surged from less than half a trillion cubic feet in 2000 to about five trillion now, and government experts reckon the US could have about 860 trillion cubic feet of recoverable reserves. So the rising substitution of gas for oil and coal together with higher absolute levels of gas and oil production raise the enormous prospects of (i) US energy self-sufficiency within a few years, (ii) the end of the US trade deficit to all intents and purposes since the bulk of it is oil; and (iii) the diversion of oil import dollars to domestic companies and households along with a dominance in the technology that will be much sought after by many others with large deposits, including China, Argentina, Mexico, South Africa, Russia and, of course, the Middle East. |
This transformational impact will outweigh any environmental objections, he says:
| The big obstacles, as most of you probably know better than I do, are environmental in the form of polluted water and earthquake risks and the intensity of water usage. So the question really is whether the strategic significance will win out over the environmental risks. I suspect the answer is yes, but this is difficult to say with precision. |
The other factor that shook up the UBS advisor’s bearish position on the US economy is slightly more esoteric: 3D printing. Confused? Then read on:
| This transformative manufacturing revolution, where, I have to say, the US is again one of the few top dogs in the technology, is not yet widely understood or acknowledged but it promises to do a number of things, including: (i) ending large-scale component manufacturing and the need for associated capital spending and retooling; (ii) making long and complex global supply chains almost redundant which, on the face of it, would be obviously bad for countries like Germany, Japan and even China. |
There is something of the Ester Boserup – a Danish economist who argued that better technologies would allow society to expand the usable set of finite natural resources – to Magnus’s claims here. If he is right is anyone’s guess. But, don’t worry, for now, Magnus is still bearish on the near-term US economic prospects:
| I still think that the pre-crisis prognosis for sequential rounds of mini-cycles built around sub-trend growth still holds good to me, certainly for the time being. Remember that employment creation, while up, is still pretty anaemic and many labor market metrics like the participation rate and the employment/population ratio reveal lingering structural weaknesses in terms of getting people back into work. And once you strip out government transfers, household sector income is still struggling to return to the peak levels of four years ago because of rather depressed levels of wages and salaries. |
Further reading:
Dollar bears in for shock if US cuts energy imports- FT
The printed world - Economist