genie.pngWith the Chairman of the US Federal Reserve saying the outlook is “unusually uncertain“, its time to summon the chemical market genie.

Of course, rubbing the lamp is not always successful. And if the genie does arrive, one can only ask 3 questions.

So rather than risk wasting them, the blog has learnt to spend the first question in asking him to decide the other two questions.

And this is what the genie said:

genie1.pngThey should be obvious, even to you, blog. Ask me what is happening to the US economy? It dominates the global economy, as you have written many times”.

So I asked, and the genie answered, laughing:

” You have wasted a question. You already know what is happening to the US economy. It is heading back into the downturn, now the stimulus programmes are ending.

“In Q3 last year, GDP grew by 1.6%, and by 5% in Q4. But then it slowed in Q1 to 3.7% and now Q2 is estimated at just 1.6% again. But I can understand that you have been hoping a proper recovery might be underway, particularly after the industry has had such a strong H1.”

Thank you, O genie, I replied, and so what should be my second question? The genie sighed, and I thought for a moment he was going to disappear back into his lamp.

genie1.png

“Ask me about the US housing market? You surely know that this used to be a $35bn chemical market in 2006, when there were 2.2m housing starts? But you can start by answering my two-part question:

“How many new US homes sold last month for over $750k, and how many for over $500k?
The blog knew the answer, and replied “zero, and 1000”.

“So, said the genie, the rich aren’t buying. And as 23% of all homeowners owe more on their mortgage than the home is worth, and sales in July were an all-time low of just 276k annualised (worth just $5bn), then this major market will provide little support for future chemical sales”Chastened, I waited for him to reveal my 3rd question.

“Again, it is obvious”, he replied. “Even you have been writing about it since February 2009. Ask me about the potential impact of deflation.”

“But if I can interject, O genie, all the commentators suggest that we are in a ‘bond market bubble’ and that we should really worry about inflation?”

At this, the genie laughed for a very long time.

“You amuse me, blog”, he finally replied. “So I will allow you this extra question. Ask all of your friends if they have read an article about this so-called ‘bond market bubble’? And then ask them if their own pension fund is now even 50% in long-term G7 government bonds? You will find there is indeed a bubble in articles about a ‘bond market bubble’, but very few people actually own them”.

So the genie then answered his 3rd question, reminding the blog of an analysis in Barrons, the US investment magazine.

genie1.png “Today, if you’re a Western baby-boomer (born between 1946-64), you now need to save $1.42 if you want to have $2 in 10 years time, with interest rates at 3.5%.

But when rates were at 7%, you only needed to save $1 to achieve the same result.

“Now, blog”, he then added. “You wrote about the baby-boom generation only last week. You can surely see why they are beginning to panic about their future income level in retirement?

“After all, a 1% fall in interest rates has the same impact on a pension fund as a 15% fall in the stock market. So it is very likely that the collapse of the housing market is just one sign of the change that is taking place in the wider economy.

“And don’t forget, blog, that the EU, USA and Japan (whose populations are filled with ageing baby-boomers), have a combined GDP of $36trn, or 62% of the total world economy.

“If their baby-boomers stop spending and start saving, which they must do to protect their retirement income, then clearly global chemical market growth rates cannot go back to the levels seen before 2008.”

And with that, the genie disappeared back into his lamp, leaving the blog to ponder on the implications of his answers for chemical sales in the rest of 2010, and in future years.

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