It is 7 years since global stock markets bottomed after the 2008 financial crash. But as my regular 6-monthly update on their performance shows, it has been a very mixed picture since then. The chart shows how prices have moved since their pre-2008 peak in the world’s 8 major markets, and in the US 30-year bond market:
- Pre-crash history showed markets moving steadily upwards over time, in line with their own circumstances
- But since 2008, only 3 markets have reached new post-crash highs, plus the US 30-year bond (blue column)
- The US S&P 500 is up 29%, Germany’s DAX is up 22% and India’s Sensex is up 18% (but are all lower than March 2015)
- The UK FTSE is down 9% and Japan’s Nikkei down 7%
- China’s Shanghai index is down 54%, Russia’s RTS is down 66% and Brazil’s Bovespa down 32%
- The only market that has consistently shown gains is the US 30-year bond, whose price is up 43%
This is not good news for those who believe that stock markets always rise over time. And it is a particularly weak performance, given that the major central banks have deliberately targeted stock markets in their stimulus programmes. As then US Federal Reserve Chairman Ben Bernanke wrote in November 2010:
“Higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.”
Clearly, this theory has been proved to be incorrect, with global GDP falling a record amount in current dollars in 2015, according to IMF data. It was always hard to see why it should work, given that even in the US, just 40% of the population have $10k or more invested in the markets, according to latest Gallup data.
The performance of individual markets is also throwing up warning signals:
- Japan and the UK were positive a year ago, but have now retreated; half of Germany’s and India’s gains have also evaporated since March 2015: even the USA is lower than a year ago
- China, Russia and Brazil are very close to their lows in March 2009
- Only the US 30-year bond is still making new highs, and seems to have peaked at least for the moment
The bond’s performance is very revealing. Policymakers have done everything they could to ignite inflation, as this is critical for reducing the real value of all the debt they have created. Yet investors have effectively bet against their success, and have continued holding the 30-year bond, even though its yield was just 2.75% on Friday night.
The market’s performance confirms the Great Unwinding of policymaker stimulus is underway. It will likely prove an increasingly bumpy road, as the policy failures since 2009 become more widely recognised.
WEEKLY MARKET ROUND-UP
My weekly round-up of Benchmark prices since the Great Unwinding began is below, with ICIS pricing comments:
Brent crude oil, down 62%
Naphtha Europe, down 59%. “The naphtha arbitrage window from Europe to Asia remains closed, thus shutting out a key export outlet for Europe”
Benzene Europe, down 54%. “The sudden rise puzzled some players who continued to see largely unchanged fundamentals”
PTA China, down 41%. “Demand was stable, with regular enquiries for cargoes”
HDPE US export, down 36%. “Some market players reckoned that the price uptrend cannot be maintained in the long term as China’s economic performance has not improved substantially”
¥:$, down 11%
S&P 500 stock market index, up 3%
Very large amounts of copper, iron and other commodities are in long-term storage in China as part of the ‘collateral trade’. More recently, it seems large amounts of polyethylene (PE), ethylene glycol (MEG) and probably other chemicals have also started to be used for the trade.
None of this used to matter when the Chinese economy was booming. Why ask too many questions, when the profits are rising? But now China’s economy is slowing fast under the new leadership.
So now people are asking questions about why, for example, polyethylene imports appear to have risen 20% in H1 versus 2013, as the chart above shows, based on Global Trade Information Services data:
- Could total demand in a large, nature market like China’s really have grown 12% in H1?
- It was already nearly 20 million tonnes in 2013, and now it seems to have grown another 1.2MT in 6 months
- We can certainly believe that production has grown 6% as China continues to support its job market
- But can import demand really have grown 20% over the period to 5MT?
The blog, like many others, is left scratching its head about what is happening.
The likely answer comes from the insight of the famous fictional detective, Sherlock Holmes:
“When you have eliminated the impossible, whatever remains, however improbable, must be the truth?”
If we apply this rule, then we must eliminate as impossible the idea that China’s demand could have grown 12%. Instead we must accept that the imports have been used for some other purpose, however improbable this may seem.
Luckily, however, there is good support for this conclusion when we look at what has been happening in other commodity markets such as copper and iron. Vast amounts of these commodities have been stored in warehouses as part of the ‘collateral trade’, as the blog described in its recent China Compass research note.
Fellow-blogger John Richardson has described recently how ethylene glycol also appears to be involved. And in a “must read” post yesterday, he describes how polypropylene also appears to have been used – via the establishment of full-scale BOPP lines – for the same purpose.
The logical conclusion from the import data is that PE has become part of this trade, which appears to work as follows:
- A company buys PE from an overseas supplier on 180 days payment terms
- They immediately sell the volume on the Dalian futures exchange
- Now they have money to invest in the property market at rates of up to 60%
- They can then ‘roll over’ the purchase after 180 days by selling to a Hong Kong-based company
- This company opens a letter of credit and can use the proceeds to ‘roll over’ the previous trade
The risks of a disorderly unwinding of China’s “collateral trade” are now rising day by day, as the leadership tackles the housing bubble. As the Wall Street Journal reports, 17 cities now have inventories of unsold housing that will take at least 5 years to clear at current sales rates.
PE producers and consumers need to urgently develop a strategy to deal with this possibility. Waiting until it happens will be too late.
Ms Kay Sun is a 32 year-old administrative assistant in Shanghai, earning $29k/year (Rmb180k). Last month, like many 30-somethings around the world, she put down a deposit on an apartment. But the cost of Ms Sun’s ordinary one-bed apartment was in a different league. It was priced at $460,000 (Rmb2.85m). And as the Wall Street Journal reports, her purchase is considered ‘normal’ in today’s China.
China’s urban property market only opened up in 1998. Before then, the state owned everything, and told you where to live. Even today, peasants in the rural areas build their homes on state-owned land. So families have never known a property crash. They are comfortable chasing prices higher because they believe “the government would never allow prices to fall”.
This was certainly true of the past 10 years. The government allowed rampant speculation to drive house prices through the roof to compensate for modest incomes, as it tried to create a ‘middle class China’. But today’s apartment prices are now well beyond the reach of most ordinary Chinese, with average per capita urban incomes just $4k in 2012.
Thus the new leadership may have different priorities as official newspaper China Daily notes:
“Recent reports of the monetary authorities and the Chinese Academy of Social Sciences both say high housing prices have already seriously affected ordinary people’s livelihood and undermined their capability to buy a house. The excessively high proportion of income that ordinary people have to set aside to buy a house forces them to drastically cut their consumption in other fields, which is not good for the overall economy…
“If the new leadership shows zero tolerance toward speculation and expedites efforts to implement sweeping reforms in the housing market, such as adopting harsher credit and taxation policies, to deflate the price bubble, then the market will jump back on the track of reasonable and healthy development.”
Bursting the bubble will have potentially nasty affects in the short-term. But as Ma Jiantang, China’s Statistics head, noted on Friday, a shift in policy “to narrow the rich-poor gap” is now essential for the country’s longer-term stability.