The Real Economies Set To Dominate Q2



NikkeiVLCC.pngBy John Richardson

Sometimes a picture is worth many thousands of words.

The above chart, supplied by one of the blog’s resources analyst contacts in Perth, Western Australia, neatly illustrates the dangerous divergence between real ecoomies and financial markets. As the Nikkei 225 has surged, Arabian Gulf very large crude carrier (VLCC) freight rates to Japan have declined.

And, as the S&P 500 has climbed polyvinyl chloride (PVC) consumption in Europe has continued to fall. This tells us that:

1.) Continued ample financial market liquidity, via the ultra-loose monetary policies of central banks, has failed to achieve a turnaround in manufacturing and consumer spending.

2.) In fact, speculative funds that have poured into crude oil, thanks to central bank money, have made demand worse because of expensive crude.

Where do we go from here?

We think that problems in the real economies of China, Europe and the US will become more apparent when chemicals and other companies report their Q1 financial results and are forced to revise-down their forecasts for the rest of the year.

Investors will, thus, retreat to safety and we will see significant corrections in equity markets, crude oil and other commodity prices.

On crude oil, Marshall Adkins , Director of Energy Research at Raymond James & Associates, makes these very interesting points in this article from The Energy Report:

“China has been the main component of global oil demand growth over the past decade. So if China goes into an economic funk or somehow slows its demand growth, then oil is in big trouble.

“The main thing supporting oil prices right now on a global basis is the fact that over the past 18 months, we have removed 2.5 million billions per day (MMb/d) from global oil supply. That’s over 3% of the world’s oil supply eliminated in a short period of time.

“Saudi Arabia has cut 1 MMb/d, Iran has been forced to reduce its exports by 1 MMb/d, and Sudan’s and Syria’s civil war strife has cost another 0.5 MMb/d.

“The staggering thing about this massive oil-supply reduction is that the world is still building oil inventories! Normally, if you get a 0.5% or 1% swing in supply, that’s a huge mover of global oil prices. We’ve had 3% of oil supply knocked offline, and we’re still building inventories. To me, that’s an incredibly bearish statement that the market is ignoring.”

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