Suspense rises as Great Unwinding becomes the Great Reckoning

Financial Events

SHARE THIS STORY

GU 20Aug16

There is a distinct difference between “suspense” and “surprise.”  Alfred Hitchcock

It is now 2 years since the start of the Great Unwinding of policymaker stimulus.  On 15 August 2014, Brent was at $105/bbl, and the US$ Index was at 81. Since then, as the chart shows, Brent oil prices have fallen 53%, whilst the US$ Index has risen 16%.

These are astonishing moves, given that they were more or less totally unexpected by consensus thinking.  What is even more astonishing is that they have not yet prompted any major changes in consensus assumptions about the outlook for the global economy.

“Yet”, of course, is the operative word.  As the great film director Alfred Hitchcock explained:

“We are now having a very innocent little chat. Let’s suppose that there is a bomb underneath this table between us. Nothing happens, and then all of a sudden, “Boom!” There is an explosion. The public is surprised, but prior to this surprise, it has seen an absolutely ordinary scene, of no special consequence.

“Now, let us take a suspense situation. The bomb is underneath the table and the public knows it, probably because they have seen the anarchist place it there. The public is aware the bomb is going to explode at one o’clock and there is a clock in the decor. The public can see that it is a quarter to one. In these conditions, the same innocuous conversation becomes fascinating because the public is participating in the scene. The audience is longing to warn the characters on the screen: “You shouldn’t be talking about such trivial matters. There is a bomb beneath you and it is about to explode!”

“In the first case we have given the public fifteen seconds of surprise at the moment of the explosion. In the second we have provided them with fifteen minutes of suspense.”

This exactly describes the state of financial markets today.  Some people have seen the bomb being placed under the table – not by the anarchist, but the the central banks.  It is the debt they have created, that can never been repaid.

But consensus thinking is still chatting idly away, convinced that markets are in an absolutely ordinary state.   When the debt bomb explodes, they will claim to be surprised – just as they claimed after 2008 that “nobody could have seen the financial crisis coming“.

The rest of us remain in a state of suspense.  We know the bomb will explode, even though – unlike in Hitchcock’s movie – there is no clock visibly ticking away to tell us exactly when this will take place.  What we do know, however – after 2 years of the Great Unwinding – is that the Great Reckoning is coming close:

□  Until now, we have merely seen the unwinding of policymakers’ ability to hijack markets in their desired direction
□  Today, however, markets are rediscovering their core role of price discovery, based on supply/demand fundamentals
□  The rise in oil market volatility is one clear sign of this – one moment, traders worry about new liquidity from the central banks; next, they worry about where to store all the surplus oil and gasoline that is being produced

Today, on the second anniversary of the Great Unwinding, the focus is now moving to the next scene, the Great Reckoning.  That is the moment when people no longer worry about anticipating the impact of stimulus policies on financial markets.  Instead, they will worry, once again, about real world issues.

Suspense is therefore rising for those of us who have seen this movie before in 2008.  But for everyone else, life simply appears to be going on as normal.

WEEKLY MARKET ROUND-UP
My weekly round-up of Benchmark prices since the Great Unwinding began is below, with ICIS pricing comments:
Brent crude oil, down 53%
Naphtha Europe, down 54%. “A few European refiners are beginning to cut back on crude processing because of the lower margins”
Benzene Europe, down 49%. “Strong downstream demand in Asia has also pushed benzene prices in the region higher”
PTA China, down 41%. “Market expected to remain bearish until mid-September”
HDPE US export, down 27%. “Subdued buying appetite at the high-end prices weighed on prices”
S&P 500 stock market index, up 12%
US$ Index, up 16%

PREVIOUS POST

US pensioners pay the price for Fed's monetary policy failure

19/08/2016

There was one bit of good news this week.  For the first time since the financi...

Learn more
NEXT POST

China becomes net PTA exporter, whilst cotton prices tumble

24/08/2016

China used to be the world’s largest importer of PTA (the raw material for...

Learn more
More posts
Chart of the Year – CAPE Index signals negative S&P 500 returns to 2030
20/12/2020

Each year, it seems there is only one candidate for Chart of the Year. And 2020 is no exception. It ...

Read
Economic risks rise as the lockdowns end
14/06/2020

It is now 13 years since I wrote the first post here, in June 2007. A lot has happened since then: ...

Read
China’s property sector is at the epicentre of the crisis
29/03/2020

A branch of Centaline Property Agency in Hong Kong © Bloomberg Indebted Chinese property developers...

Read
“They may ring their bells now, before long they will be wringing their hands”
15/03/2020

The wisdom of Sir Robert Walpole, the UK’s first premier, seems the only possible response to ...

Read
Will stock markets see a Minsky Moment in 2020?
05/01/2020

Few investors now remember the days when price discovery was thought to be the key role of stock mar...

Read
Chart of the Decade – the Fed’s support for the S&P 500 will end with a debt crisis
22/12/2019

Each year, there has been only one possible candidate for Chart of the Year.  Last year it was the ...

Read
$50bn hole appears in New York financial markets – Fed is “looking into it”
29/09/2019

Most people would quickly notice if $50 went missing from their purse or wallet. They would certainl...

Read
China’s renminbi and the global ring of fire
01/09/2019

China’s property bubble puts it at the epicentre of the ring of fire © Reuters  China’s de...

Read

Market Intelligence

ICIS provides market intelligence that help businesses in the energy, petrochemical and fertilizer industries.

Learn more

Analytics

Across the globe, ICIS consultants provide detailed analysis and forecasting for the petrochemical, energy and fertilizer markets.

Learn more

Specialist Services

Find out more about how our specialist consulting services, events, conferences and training courses can help your teams.

Learn more

ICIS Insight

From our news service to our thought-leadership content, ICIS experts bring you the latest news and insight, when you need it.

Learn more