Today I'm publishing my Flow Essentials booklet for the world's largest economies during 1Q2011.
What's is that? At the root of my macroeconomic analysis is an attempt to understand the factors which go to determine the shape and strength of trade and investment cycles, and in addition measure and track the cashflows which go with it. My experience is that if you understand this, you're unlikely to go far wrong in your economic and investment judgements.
This, I guess, is the legacy of starting from a philosophical disposition that favours microeconomics, followed by a career ensconced in equity research departments, sometimes cloistered with the brilliantly intuitive David Scott. I attempted to systematise on a macro levels the sort of insights given on the micro-level by Dupont analysis, looking at return on capital (via asset turns), labour productivity, margins, leverage, and then the savings and cashflows which result from these cyclical determinants.
Each quarter, I use the national accounts to work out proxies for these various ratios, and today I'm publishing the 1Q booklet for the US, Eurozone, China and Japan. It's the cycles in these countries which make the weather for everyone else. You can download it here:
Flow Essentials 1Q - The Big Beasts
The lessons? The investment cycle looks best-entrenched in the US, and most at risk in China. Banking systems are allocating capital badly everywhere. The rise in commodity prices has brought a reset back to 2008's painful levels for the Eurozone and Japan, but not for the US or (apparently) China. Every single economy is running significant savings surpluses - but in the US and China, they are now in decline. On current trends, we'll have to think seriously about these around 2013 - but my guess is the 'on current trends' clause will lapse pretty quickly.
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