We reach the end of the year and we start to read many investment banks and strategist reports with the outlook for 2020.

What are we reading so far? First, next year’s growth will likely be stronger because of the relaxation in monetary policies and the end of trade disputes. Second, what we’re also reading is a much more benign view about emerging markets and also a stronger view on commodities. So, basically, what we’re reading yet again is a rehash of the old reflation trade for 2020. However, let’s be cautious about a number of things:

• A preliminary trade agreement is likely to be a zero-sum
  game. There is no evidence that China is importing less than it needs, rather the opposite, as we can see in inventory builds, so reaching an agreement to import a bit more from the US may simply mean fewer imports of those products from other countries.
• The slowdown of both China and the United States has nothing to do with trade wars and a lot to do with debt saturation and late-cycle signals.
• The reflation trade on commodities is predicated on the view that the US dollar will weaken because of the Fed’s accommodative policy. This policy easing may well continue but we need to be cautious about placing aggressive bets on dollar weakness because the demand for the US currency is rising as the maturities of US dollar-denominated debt pile up, added to lower foreign exchange revenues from lower exports and weaker growth.
• Despite some positive headlines and some leading indicators bottoming down, it seems difficult to expect stronger growth in 2020 even less so a sustained increase in inflation (at least in the official CPI) because technology disinflation, demographics, and debt saturation remain as deflationary forces.