Wednesday, May 3, 2017

Magic Eight Ball: PMI, Oil & Copper

That was today in London -- the above graph is for copper and when copper falls things are serious.  Now the reason for the fall is that inventories jumped 12% -- obviously the "culprit" is China (not really but that's what going to be written in the press!).

The reality is that the world seems stuck in neutral, and China -- the $1 dollar work shop of the world is feeling the sting.  Despite massive infrastructure spending the country's growth is decelerating, moreover, the government seems to finally take the growing debt problem seriously, forcing banks to recognized off-balance sheet loans as part of the banks' lending and thereby leverage.

On the other side of the planet (i.e. America) we have consumer sentiments rising, but PMI (actual hard numbers manufacturing) slowing to zero growth.  For the past few months, the current American administration has been glowing in the rising consumer sentiments -- unfortunately, with more than 8,000 announced store closures the reality between sentiment and real spending is going the wrong way.  Q1/2017 GDP numbers were meager with a 0.7% GDP growth -- substantially below the 5% to 6% that the current administration is hopping that will be achieved.

Finally, there is oil prices that are down to $47/bbl which is way of the $53/55 range we saw a few months ago.  Again, demand is lagging (and supply is exploding), so prices have only one way to go -- down! (Please note that I have zero idea if oil prices will continue their downward trend).

In America, the world's economic growth engines things are difficult -- the increased level of uncertainty created by the administration (in or out of NAFTA, war with Korea (either ones), fight with allies) has created an environment were investing is delayed -- should there be a demand for investments.  Over the past decade American companies (with few exception) have seen reduced capital expenditure, rather spending free cash in buying up shares -- or M&A activity -- which produces very little (especially since the vast majority of M&A activity is a value destroyer process).

Americans have increased spending power, but this power is skewed; it was revealed a few days ago that nearly 30% of all Americans have zero reserves for contingencies, and that another 20% have less than $250.00 in savings -- enough to last a few days only.  Median income remains exactly where it was 40 years ago (1977), but the top 10% has seen income growth of nearly 10% per annum -- so those who are better off are a lot better off.  Lower down in the food chain:

  • Same income as 40 years ago
  • Everything is more expensive (a new family mini-van is priced at US$ 50k)
  • Less certainty of employment
  • New jobs are at much lower salaries

Debt helped, a lot of young people took on student loan with the hope of improving their lot, unfortunately, a lot of that money was wasted!  Education is one area of the economy that has seen massive inflation -- worse than healthcare, and substantially above all other goods.

A lot of Americans, especially if they voted for Trump & friends, bought the Cool Aid and believe that Trump will:

  • Create better and cheaper healthcare for all
  • Grow the economy by more than 5% per annum
  • Reduce taxes
  • Created a massive infrastructure program
  • Bring back coal as a major source of energy
  • Make America great again

Considering that Trump himself didn't understand how complicated governing was, its natural to understand that his supporters don't understand either.  They view welfare queens as someone else, that their tax rates will fall and that the economy will resemble that of China if only we stop all these damn foreigners selling stuff in our country.  The populist, limited understanding of reality is attractive as a political slogan, unfortunately, it translates poorly in the real world.

Now, returning to our subject of the world economic growth.  China is an export driven economy, and as such the weaknesses of the country are a reflection of G8 weaknesses -- Europe is still suffering from massive unemployment -- 10% in France, and much higher in Spain, Portugal and Greece. Oil prices are weak because of a shift in supply and a reduction (even small) in demand.

Unless, Americans and europeans increase their spending power -- that means less inequality in the US and less unemployment in Europe, the odds of a rebound are small.


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