Which explanation is the right one?
A combination of the second and the third. Yes, we had a massive buying panic this summer – and yes, the bond market is the biggest bubble of our lifetime. This is bigger than the tech bubble of 2000 and the real estate bubble of 2007.
Why isn’t the bond market just signalling a dramatic economic slowdown?
We certainly see a slowdown, particularly in the industrial sector. The reason for this is a significant, structural slowdown in the automotive sector, which helps explain the collapse of the manufacturing sector in Germany. An often overlooked issue is the Boeing 737 Max fiasco, which has unleashed supply disruptions all over the US, Canada, Germany and other economies. Trade war uncertainties have restrained capital expenditure decisions. And last but not least, the Chinese economy is slowing down. But: This is a slowdown, not an epic meltdown in the form that the bond market seems to be suggesting.
What’s ailing the automotive sector?
There are a number of structural issues, but the most significant development has been the realization that the Chinese car market is done growing. For years, the Chinese market has been growing by two to three million cars per year. Financial markets have just extrapolated this kind of growth into the future. But that turned out to be wrong. The Chinese car market has probably hit its limit at 25 to 30 million units per year. In most parts of the world, the auto sector has stopped growing. It’s no surprise then that Germany has seen such a collapse lately.
How worried are you about China in general?
I’m not worried. China is managing a stabilization around a 6 per cent growth rate. The manufacturing PMI has marginally crept back up above 50, which was the effect of a little stimulus by the central government. When it comes to China, foreign investors always have this idea that either China is on the brink of taking over the world, or they are on the brink of a catastrophic collapse. There certainly are structural issues to the Chinese economy – debt levels and demographics, to name two –, but overall, the economy is stabilizing.