Oil price collapse, US$ rise confirm Great Unwinding underway

Economic growth

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GU 15Nov14AStock markets are floating ever higher on an ocean of central bank money printing.  But something else is happening in the real world where we all live and work.  Since August, I have been warning that the Great Unwinding of this policymaker stimulus is now underway.  The chart above highlights how my 2 core forecasts have now been confirmed:

  • Brent Oil prices have fallen nearly 25%, and the IEA expect “downward price pressures could build further in H1 2015” (blue line)
  • The US dollar has rallied 8% versus the world’s major currencies, with the G-20 warning  “The global economy remains vulnerable to shocks, financial fragility remains” (red)

This also confirms the core argument in Boom, Gloom and the New Normal, which suggested the global economy was entering a New Normal.   $35tn of stimulus hasn’t restored growth to SuperCycle levels, as the IMF has noted.  Instead, the ‘demographic dividend’ that drove the economic SuperCycle has become a ‘demographic deficit’.

The key to the Unwinding is China.  President Xi Jinping simply has to set a new economic course:

  • He inherited the results of the 2009 – 2013 stimulus programme
  • This was based on a ten-fold rise in lending, from $1tn to $10tn
  • The result is that the country now has to pay $1.7tn each year in interest
  • This is more than the entire economies of S Korea, Malaysia or Indonesia

Xi and his colleagues have prepared for this New Normal for 2 years.  As before in times of Crisis (Deng in 1977, Jiang in 1993), they have taken detailed advice from the World Bank.  They know that China has to reverse its economic course.  And the time to make the break with the past is when you start, when people are ready for change.

I will look in more detail at some of the key implications of the Great Unwinding tomorrow and during the rest of this week.

 

WEEKLY MARKET ROUND-UP
The weekly round-up of Benchmark prices since the Great Unwinding began is below, with ICIS pricing comments:

Benzene Europe, down 36%. “ample availability and weak derivative demand were the key drivers for the current downward momentum”
Naphtha Europe, down 29%. “Prices plunged closer to the $600/t mark on low upstream Brent crude oil futures, remaining at a four-year low”
PTA China, down 25%. ”Price increases in the futures market were attributed to buying activity by PTA producers, in line with expected lower operating rates at PTA facilities in the near term.”
Brent crude oil, down 23%
¥:$, down 14%
HDPE US export, flat. “With the chances growing for a US PE price cut, producers may weaken in order to manage inventories with the year-end in mind”
S&P 500 stock market index, up 4%

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