The last few days have seen financial markets rallying, whilst the news from the real economy gets worse. US GDP growth in Q2 was just 1.5%. And the Wall Street Journal notes the recovery since 2009 has been the weakest in the post-War period.
But that doesn’t matter to the computerised trading systems that now dominate financial markets. Their owners simply hope this bad news will encourage policymakers to provide them with more firepower for their high-frequency trading, via further stimulus efforts.
The chart shows the periods (yellow arrows) of QE1 from March 2009, QE2 from August 2010 and Operation Twist from August 2011. These have led to enormous trading profits in financial markets. But by also increasing oil prices to record levels, they have destroyed any prospect of a recovery in consumer demand.
As the great scientist Einstein wisely remarked, a good definition of lunacy is to repeat the same action, and expect different results. Clearly the 3 rounds of quantitative easing have so far failed to produce a meaningful recovery. So why should a 4th be any different?
Meanwhile in the real economy Dow CEO, Andrew Liveris, spelt out the key issues in his H1 report on Thursday:
“The new reality is that this world is not in a normal growth mode, and it does not appear that we will see this for at least 12-24 months. The global GDP will struggle to get close to 3% in the next 12-24 months on a sustained basis.”
On China, his outlook was even more sobering, as he warned that its GDP was now “Probably running at very low numbers right now, a 3%, 4%, 5% number at best.”
BASF chairman, Kurt Bock, was similarly downbeat when reporting. Their results were supported by the Oil and Gas business. But Bock warned that BASF had abandoned hope of “an upturn in demand in H2″ and he forecast global GDP at just 2.3% – essentially, recession level. Equally, in Asia he warned that:
“Q2 sales decreased – as they did in Q1… (whilst) volumes in China had been flat in Q1 and Q2, a sharp contrast to previous quarterly growth. No-one can tell when business will pick up again. Customers were acting very cautiously, and continue to reduce inventories to the very minimum.”
Maybe, one day, policymakers will realise it is today’s changing demographics that are driving the changes underway in the global economy. Until then, they will continue to treat symptoms, not causes.
Benchmark price movements since the IeC Downturn Monitor’s 29 April 2011 launch, with latest ICIS pricing comments, are below:
HDPE USA export (purple), down 26%. “Prices were notionally higher, with material in short supply”
PTA China (red), down 26%. “China’s polyester demand improved this week, driven by firmer feedstock prices”
Naphtha Europe (brown), down 24%. “The market lengthened this week as demand remained lacklustre, and opportunities to move surplus stock out of Europe were reduced as the arbitrage to Asia remains closed.”
Brent crude oil (blue), down 16%
Benzene NWE (green), down 1%. “Europe remains undersupplied, with many units underutilised. Low cracker rates have ensured that pygas remains limited, further curtailing supply”
S&P 500 Index (pink), up 2%