The global economy is now in the middle of its 3rd downturn in the past 4 years. The chart above shows how the blog’s benchmark products have acted as leading indicators on each occasion (yellow highlight):
• In 2008, naphtha (red line) PTA (purple), benzene (green) and polyethylene (PE, blue) all peaked around the middle of July, and fell sharply for the rest of the year
• In 2011, benzene and PTA led the downturn, peaking in March. Naphtha and PE followed, causing the blog to launch the IeC Downturn Alert
• This year, the downturn again began in March. And as in 2008, all 4 benchmark products peaked at the same time
In 2008 and 2011, policymakers assumed that the world faced a cash-flow shortage. So they reacted by flooding the markets with borrowed money. Many governments also introduced major stimulus programmes to enable the economy to reach escape velocity again, and return to the steady growth of the 1982-2007 supercycle.
Unfortunately, as is now becoming clear to a wider public, they made a terrible mistake. The real problem in the world economy is excess debt. And one cannot solve a debt crisis by adding more debt. The short-term ‘sugar high’ that it creates soon disappears.
The best guide to what is happening comes from Hyman Minsky. As the blog wrote in September 2008, when the crisis began to unfold, a long period of stability, such as that seen during the supercycle, leads investors to become complacent about risk:
“They believe that a new paradigm has developed, where high leverage and ‘balance sheet efficiency’ should be the norm. They therefore take on high levels of debt, in order to finance ever more speculative investments.
“Eventually, however, a ‘Minsky moment’ occurs. Earnings from the new investments prove too low to pay the interest due on the debt. Confidence in the ‘new paradigm’ disappears and, with it, market liquidity. Investors find themselves unable to sell the under-performing asset, and suddenly realise they have over-paid. In turn, this prompts a rush for the exits. Prices then begin to drop quite sharply, as ‘distress sales’ take place.”
If policymakers had dealt with the debt issue in 2008, we would by now be in recovery mode. Instead, as the benchmark products indicate, we are back on the same path as in 2008. The only difference is that the economy is suffering from even more debt.
The risk from a second Minsky Moment is thus even higher than in 2008.
Naphtha Europe (brown), down 38%. “Prices fell to their lowest level since September 2010”
PTA China (red), down 30%. “Production cutbacks in China’s polyester sector continued, as producers needed to offload inventories with high feedstock costs”
HDPE USA export (purple), down 28%. “Producers unwilling to drop prices further with weak global demand ”
Benzene NWE (green), down 4%. “Market is totally detached from movements in the value of Brent crude because the market is so tight”