“Confusion now hath made his masterpiece”. This quotation from Shakespeare’s great tragedy, Macbeth, aptly sums up the state of the world economy.
Policymakers refuse to accept that the BabyBoomer-led economic SuperCycle is over. And so they continue to believe that adding vast amounts of electronic money to the financial system will return the economy to SuperCycle levels of growth. The charts above confirm they are failing:
- The latest update on US GDP growth for Q1 from the Atlanta Federal Reserve Bank showed it at just 0.1%
- American Chemistry Council data shows February’s global chemical industry capacity utilisation was just 81.6%
Instead of accepting its analysis was wrong, the Fed is now going back to its post-2008 policy of devaluing the dollar.
As a result, currencies are in turmoil and oil markets are seeing near-record levels of volatility. Last week, oil prices moved an astonishing 12%, even though nothing happened in physical markets. And since 1 January, there have been 11 weeks in which oil prices moved by 10% or more.
CHEMICAL MARKETS CONFIRM THE SLOWDOWN
Currency movements take time to impact the real economy, and so chemical markets are now highlighting the impact of last year’s dollar strength:
- February’s 81.6% level was the lowest February level since February 2009, and the 2nd lowest on record
- N American output grew 2.2%, versus 5.2% in February 2015: Latin America remains in recession, down 5.5%
- Europe was the big winner due to the stronger dollar, with W Europe up 4% versus 2015
- Russia is also doing well, up 5.4% as it boosted exports following the rouble’s collapse
- Weaker currencies have also helped the Middle East, up 5.6%, and China up 6.5%, as their new capacity comes online and exports surge
The problem, as the data confirms, is that policymakers have created a “zero-sum” game, where one region’s gain is another region’s loss. So the US economy has slowed sharply over the past year, as the dollar has strengthened, whilst Europe’s economies are benefitting from their devaluations against the dollar.
But these “beggar my neighbour policies” don’t create overall growth in the global economy. It was down 4.9% in current dollars in 2015 according to the IMF.
Instead, their main impact is to create major volatility, as the fundamentals of supply and demand become irrelevant when the policymakers unleash new tidal waves of liquidity. And when these waves suddenly change direction – as has happened in Q1 with the Fed’s decision to devalue the dollar, it creates total confusion.
CAMERON’S TAX PROBLEMS HIGHLIGHT THE POLITICAL RISK
In turn, of course, this is starting to create major waves in the political environment, as last week’s release of the Panama Papers has confirmed. One prime minister (Iceland) has already resigned, and the UK’s premier, David Cameron, is under major pressure. The issue is simple, as Peggy Noonan, President Reagan’s former speechwriter, warned recently:
“In wise governments the top is attentive to the realities of the lives of normal people, and careful about their anxieties. That’s more or less how America used to be.”
Noonan is absolutely right. What is true for America is true for governments everywhere, and for companies.
When I worked in ICI, then the world’s 2nd largest chemical company, we not only followed the rules on tax, but also worried about what ordinary people would think. If we were unsure of what to do, we always asked ourselves – “how would this look on the front page on the Daily Mail?” – the voice of middle England, and now the world’s most popular news website. The front page of yesterday’s Daily Mail therefore tells us the problem now facing Cameron:
“Cameron’s tax bill dodge on mother’s £200k ($280k) gift: New row over historic decision to publish the PM’s tax return after it is revealed family avoided £70k bill when his father died”
This scandal comes just before the June referendum, in which the UK will vote on whether to stay in the European Union. It appears that Cameron has done nothing wrong in a legal sense, but avoiding tax on this scale does not play well with an electorate where average earnings are £30k/year.
And it could well mean that the UK electorate loses its trust in Cameron. Given the closeness of the Brexit vote in June, this is a potentially dangerous development as Cameron is leading the campaign to stay in the EU. When voters don’t trust their leaders, they tend not to vote for their policies.
WEEKLY MARKET ROUND-UP
My weekly round-up of Benchmark prices since the Great Unwinding began is below, with ICIS pricing comments:
Brent crude oil, down 63%
Naphtha Europe, down 56%. “West Africa has absorbed enormous amounts of European light naphtha for gasoline blending”
Benzene Europe, down 55%. “Several players noted that the overall macroeconomic picture remains bearish”
PTA China, down 40%. “PTA plants in China continue to run at high rates, with major producers running at full capacities”
HDPE US export, down 31%. “China market outlook is not positive mainly due to strong resistance from end-users to firmer priced cargoes”
¥:$, down 6%
S&P 500 stock market index, up 5%