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Geopolitics lead to Boom/Gloom Index tumble after record high

Economic growth
By Paul Hodges on 05-May-2014

Index May14The IeC Boom/Gloom Index (blue column) proved its value again last month.  It shot to a new record high, and this was then followed by a record high for both the S&P 500 (red line) and the Dow Jones Industrials.  But now the Index has fallen sharply.  This highlights the major divergence between developments in the real world, and financial markets:

  • It was no surprise to see US GDP at just 0.1% in Q1, or that over 800k people left the US workforce in April
  • Nor is it a surprise that Abenomics is now going seriously wrong in Japan, with auto sales forecast to fall 15%

Instead, just as forecast in the blog’s New Year Outlook, policymakers’ optimism about an ‘inevitable recovery’ has once again disappointed.

The real concern about financial markets, however, is the debt of debt now taken on by traders.  Borrowing levels on the New York Stock Exchange remain at record levels at $450bn – higher, even, than during the previous bubbles of 2000 and 2008:

  • High levels of borrowing suggest that traders believe that US policymakers will not allow markets to fall
  • Thus they are happy to speculate with borrowed money, to increase their ‘winnings’
  • If someone borrows $100 to invest alongside their own $100, they double their return if the market goes up
  • But, of course, they can lose more than their original $100 if the market starts to fall

This is what has always happened in the past – as at the end of the dot-com bubble in 2000, and the subprime bubble in 2008.  Suddenly people realise they have overpaid and rush for the exits.  But we are not yet at the equivalent moment to 7 September 2008, and the blog’s now famous warning “The Price of All Assets Will Go Down“.

In the meantime, the speculators simply laugh at warnings and remind everyone of the profits they are making.

But there is no shortage of potential catalysts to cause markets to go into reverse:

  • Ukraine’s fighting continues: and the US has sent 600 troops to Poland/Baltic states to support its NATO allies
  • Oil markets look perilous, with record high US inventories starting to pressure prices
  • China’s leadership is continuing its credit crackdown on the real estate market
  • As the blog discusses tomorrow, this means developers’ cash needs are now driving polyethylene imports

And, of course, this month sees the European elections take place.  These are likely to provide further warning tremors of the earthquake that threatens today’s seemingly calm market surface:

  • It is quite possible that anti-EU parties will top the polls in 2 of the 5 major EU countries – France and the UK
  • Across the EU itself, Reuters suggests these parties could well achieve 20% – 25% of the total vote
  • Of course, conventional wisdom says they can safely be ignored, and that it will be ‘business as usual’
  • But this vote would double the Greens 7.5% in the 1989 election, which made environmentalism a major force

The key issue is that markets and companies have become complacent over the potential impact of geopolitics.  They have forgotten the world before the Boomer-led SuperCycle.  And as the saying goes, ‘those who cannot remember the past are condemned to repeat it’:

  • China’s Communist Party has no interest in anything other than its own survival in power
  • It is taking the necessary steps to ensure this survival, as the blog’s Research Note described
  • Similarly the Russian leadership does not depend on Wall Street money for its survival
  • The anti-EU parties also have their own agenda, which does not include ‘business as usual’

The blog continues to have a bad feeling about the outlook, which won’t go away.  It fears an earthquake threatens.

And it remembers its fear through 2007-8 that a hurricane was about to hit Western economies.  And also, that on the fateful weekend of 13-14 September 2008, there was not only a real hurricane in Houston, but also the Lehman collapse that triggered the financial crisis.


The blog’s weekly round-up of Benchmark price movements since January 2014 is below, with ICIS pricing comments:
PTA China, down 12%. “Inventories in China remained ample, with several market participants estimating it to be at around 1.6m tonnes, which was above the healthy mark of 1m tonnes”
US$: yen, down 3%
Brent crude oil, down 1%
Benzene, Europe, up 2%. “Many players expect pricing and availability in Europe to remain volatile”
Naphtha Europe, up 3%. “Pricing volatility has contributed to market uncertainty as traders struggle to determine positions amid mixed signals from downstream sectors”
S&P 500 stock market index, up 3%
HDPE US export, up 7%. “Producers waited to see whether global prices rise enough to make US material competitive in the global market”