“Buy on the rumour, sell on the news” is one of the most reliable definitions for a weak market. And that seems to have been the picture in Q1 across commodity, stock and bond markets.
The key issue is the ongoing battle between Reality and Illusion:
- Reality accepts that ageing populations have lower levels of demand than when they were younger. Older people already own most of what they need, and their incomes decline as they enter retirement
- Illusion suggests that policymakers can compensate by printing money. But this simply brings forward demand from the future, and creates headwinds for future growth as the borrowed money has to be repaid
Smart speculators in the hedge funds have become very experienced in profiting from the gap between the two, as the latest Boom/Gloom Index chart confirms. But they know to take their profits and move on. Thus the S&P 500 Index has so far failed to make new highs, and there was only a minor increase in the Boom/Gloom Index.
The problem is that the prospect of a return to Reality terrifies policymakers. It meant they would have to have an honest conversation with voters about the implications of ageing populations and slower growth on the economy. They much preferr to hide behind the Illusion that more stimulus can somehow return growth to SuperCycle levels.
But as Bill Gross, now at Janus, warned last week, time is running out:
“30-40% of developed bond markets now have negative yields and 75% of Japanese government bonds..
“The reality is this. Central bank polices consisting of QE’s and negative/artificially low interest rates must successfully reflate global economies or else. They are running out of time. To me, in the U.S. for instance, that means nominal GDP growth rates of 4-5% by 2017 – or else. They are now at 3.0%. In Euroland 2-3% – or else. In Japan 1-2% – or else. In China 5-6% – or else. Or else what? Or else markets and the capitalistic business models based upon them and priced for them will begin to go south.”
Q1 saw a short-lived ‘Triumph of Illusion’, which may well now be followed in Q2 by a painful ‘Return to Reality’. This will confirm that the likely key lesson of the Illusion years is that “it is better to travel in hope, than to arrive“.
WEEKLY MARKET ROUND-UP
My weekly round-up of Benchmark prices since the Great Unwinding began is below, with ICIS pricing comments:
Brent crude oil, down 62%
Naphtha Europe, down 58%. “Naphtha-based cracker margins fell further this week”
Benzene Europe, down 53%. “Upward movement on crude oil last month helped support benzene pricing and sentiment”
PTA China, down 01%. “Upstream energy prices in the crude oil and naphtha markets were volatile, causing feedstock paraxylene prices to remain bullish.”
HDPE US export, down 34%. “In China, most end-users were unwilling to purchase the cargoes at current price level which was deemed too high.”
¥:$, down 9%
S&P 500 stock market index, up 6%