Its now 3 years since the blog suggested on 2 May 2011:
“They don’t ring bells at market turning points. Otherwise, we could all retire to the Bahamas. But there is growing anecdotal evidence, from chemical buyers and the main retailers, that we may have reached at least a temporary market peak. And Brent crude oil has been stable for 4 weeks at $125/bbl”
Looking back, this turns out to have been a reasonable market call, as the chart above highlights. It shows prices between 2009 and today for the Benchmark products, to provide the necessary context *:
- Prices had shot up from 2009 in all markets, due to central bank stimulus programmes
- The yellow arrow then shows prices at Friday 29 April 2011, when the blog made its call for the Monday post
- PTA in China has suffered worst since then, and is currently down 36% (red line)
- In Europe, Brent oil prices (blue) and naphtha (black) are both down 14%
- In the US, HDPE is also down, by 4% (orange)
Equally important is that 29 April 2011 also marked the absolute peak for all these products. None of their prices has even been higher since that date.
However, two markets are higher today than then:
- The blog’s favourite indicator, benzene, has managed a 5% gain (green)
- An easy explanation for this relates to its by-product status
- Global chemical operating rates (OR%) remain weak, meaning less primary product has been produced
- Latest American Chemistry Council data shows the global OR% at 83.7%, versus the average since 1987 of 92%
- Benzene prices have thus remained firm, as supply has not been able to match demand
But benzene’s performance also helpfully highlights the one wrong assumption. This was that central banks would realise their stimulus programme had only provided a ‘sugar-high’, and had failed to stimulate the real economy. Instead, the blog assumed that policymakers would allow market forces to operate again.
Instead, as the benzene market indicates, this did not happen. Amazingly, to the blog at least, the banks chose to ‘double down’ on their bets. The US Federal Reserve has since launched 2 more stimulus programmes, Twist and QE3. In total, it has printed $1tn+ of new money, with the published intent of pushing financial markets higher.
As a result, the US S&P 500 Index (purple) is now up 38%.
The Fed’s money-printing has also led to margin debt on the New York Stock Exchange reaching an all-time high in February this year, a very worrying sign. Margin debt totals the amount borrowed by speculators to fund their trades, and high levels of debt indicate a belief that the risks of any downturn are very low:
- The two previous peaks were in March 2000 and July 2007
- History shows that neither were good times to be investing in stocks
- Speculators had instead been fooled into believing the US Fed would never let prices fall
And whilst the S&P has soared, the US housing market has begun to weaken again, as the blog described last week. It is critical to any sustained US economic recovery, but as new Fed chair Janet Yellen recognised on Wednesday:
“Readings on housing activity – a sector that has been recovering since 2011 – have remained disappointing so far this year and will bear watching. The recent flattening out in housing activity could prove more protracted than currently expected rather than resuming its earlier pace of recovery.”
So the policy has failed since 2011 to deliver the long-promised housing recovery. Instead, it has left financial markets with record levels of margin debt – a very exposed position, if further disappointments occur.
The reason for the failure is simple common sense, as the blog has remarked before, namely that the Fed cannot print babies. Falling fertility rates around the world, coupled with rising life expectancy, mean their policies cannot therefore achieve the results they expect.
The blog’s weekly round-up of Benchmark price movements since January 2014 is below, with ICIS pricing comments:
PTA China, down 14%. “Typical peak season for downstream demand in the polyester markets is coming to an end”
US$: yen, down 3%
Brent crude oil, down 2%
Benzene, Europe, flat. “Players anticipating significant volumes of material to arrive from the US and other regions”
Naphtha Europe, up 4%. “Strong gasoline blending demand from the US has boosted the European naphtha market”
S&P 500 stock market index, up 3%
HDPE US export, up 7%. “Producers are not changing prices because there is not much product available”
* The US$: yen was added later, after Japan announced its Abenomics programme