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Common sense continues to elude central banks as they battle demographic cliff

Economic growth
By Paul Hodges on 01-Feb-2016

Index Jan16aCentral banks are in a losing battle, as they try to reverse the inevitable slowdown created by the arrival of the demographic cliff.  Last year’s 5% fall in global GDP in current dollars tells its own story.

Common sense would tell them they can’t possibly win.  After all, how do you persuade New Olders in the 55+ age group to spend more money – when they already own most of what they need, and their incomes are declining as they enter retirement?

  • The New Olders will soon be 1 in 5 of the global population thanks to vastly increased life expectancy
  • And there are relatively fewer of the high-spending Wealth Creators aged 25-54 due to collapsing fertility rates

But as I feared in my Budget Outlook for 2016-18, this won’t stop central bankers from trying. Last Friday, the Bank of Japan joined the European Central Bank in moving to negative interest rates – where you pay the bank to look after your money. This is likely to create further problems in high-yield and emerging market debt, to add to those already appearing, as investors rush into stupid high-risk investments in a desperate search for yield.

As Time magazine has reported, even the strongest and best-managed companies are now being impacted:

“As Moody’s recently warned, some of the world’s biggest firms, like Royal Dutch Shell, Total, and Chesapeake Energy, are among the 175 firms that are at risk of ratings downgrades thanks to plunges in commodity prices.”

Of course, the Japanese move produced the usual knee-jerk rally in financial markets, confirming once again that the biggest rallies always occur in bear markets.  This time last year, the ‘SuperBowl Rally‘ saw oil prices rally from $45/bbl to $70/bbl, before they resumed their fall to today’s levels around $30/bbl.

But this only highlights the growing vulnerability of Western stock markets.  The chart of the IeC Boom/Gloom Index shows sentiment is weakening and market volatility is increasing.  This usually indicates a market is changing direction.  And the Index itself is now firmly back in negative territory, confirming the downturn signalled last month.

As with subprime, the banks are blind to these developments.  They are sure their economic models are just about to produce a sustained recovery, and so they see no need to consider other viewpoints.  It could be a very bumpy ride.

My weekly round-up of Benchmark prices since the Great Unwinding began is below, with ICIS pricing comments: 
Brent crude oil, down 68%
Naphtha Europe, down 63%. “Naphtha crack slips into negative territory – US gasoline inventories rise once again”
Benzene Europe, down 60%. “Prices in Europe have seen some roller coaster action over the past week.”
PTA China, down 47%. “Restocking of cargoes were just about finished, with most companies expected to stop business activities from next week due to the Lunar New Year holidays”
HDPE US export, down 42%. “Export prices remained steady”
¥:$, down 18%
S&P 500 stock market index, down 1%