The litmus test for the global economy

pH Outlook – connecting the dots of the global economy

15 June 2020

Experienced investors have always claimed the bull market wouldn’t end until new retail investors rushed to join it. The 3 million new accounts on the RobinHood share-trading platform suggest they may be right.

 


Oil

We focus on Brent as the global benchmark.

The market closed Friday down $3.50/bbl at $38.74/bbl, as traders began to worry about the rise in global inventory.

US inventories continue to rise, reaching a record 2.1bn barrels last week. And as the chart shows, part of the reason is the arrival of the Saudi imports that we have been tracking over the past few weeks. These have now averaged 1.5mb/day for 3 weeks, for a total of 32mb.

This US data confirms the extraordinary volume of oil in floating storage and in transit, at over 1.3bn barrels. This represents nearly 15 days of global demand even at the pre-Covid rate of consumption, highlighting the volume that will need to be worked off in H2.

And, of course, the world is nowhere close to returning to previous levels of consumption. Jet fuel is worst hit as most planes remain parked around the world, and distillate demand from industry remains weak. US railcar data is a good proxy for this demand, and remains down by 16% versus last year, despite the upturn from its recent lows.

Even the normally bullish Barclays commodities team only expects prices to stabilise at current levels in Q3:

“The pace of recovery in prices is likely to slow down, in our view, as the steepest decline in supply and the fastest improvement in demand is likely behind us.”

 


S&P 500

We focus on the US S&P 500 Index as the world’s major stock market index.

The market closed Friday at 3041, down 150 points over the week, although Friday’s rally meant it managed to hold onto the psychologically important 3000 level. The trigger for the decline was two-fold:

  • A downbeat report from the US Federal Reserve which noted (a)  “Global economic activity in the first half of the year has experienced a sharp and synchronized contraction greater than that in the global financial crisis” and warned (b) that domestically, “the path ahead is extraordinarily uncertain.”
  • Millions of new retail investors suffered major losses as their bets on bankrupt companies including Hertz and Chesapeake Energy ended up worthless

US investors are also becoming concerned that the re-openings of the economy may lead to a surge in new Covid-19 cases.

The cause was a warning from the US’s leading infectious disease expert, Dr Anthony Fauci, that much was still unknown about the virus. He also emphasised it is particularly dangerous for those with “higher rates of underlying conditions like diabetes, high blood pressure, obesity and chronic lung disease”.

Investors would clearly like to believe that all the risks are in the past, and that the sunlit uplands of a V-shaped recovery lie ahead. But the evidence on the ground is so far not confirming their hopes.

 


Interest rates

Even turkeys can fly in a hurricane - Interest rates – pH Outlook

We focus on the US 10-year rate, as this is the “risk-free” benchmark for global markets.

What goes up, comes down, seemed to be the message from US bond markets. The 10-year rate fell back to 0.69% from 0.90%, confirming our caution last week.

The move confirms the dangerous levels of volatility in today’s financial markets.  This in itself is a warning sign, as we have noted before, given that volatility is normally a reliable indicator of a change in direction:

  • Many investors are still convinced that markets will always recover, and so they expect interest rates to rise
  • But data for inflation continues to support our expectation of a move into deflation

The issue with deflation is that it encourages people to  defer non-urgent purchases, on the basis that prices will be lower in the future. It also means that the real value of debt rises, rather than reducing with inflation.

 


THE DAVE PORTNOY PHENOMENON

Even turkeys can fly in a hurricane - pH Outlook – Dave Portnoy Phenomenon

Legendary investor Sir John Templeton wisely observed that:

“Bull markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria.”

Other experienced investors have also noted that until now, the last wild surge of innocent new investors took place 20 years ago at the end of the dot-com bubble in 1999-2000, when the NASDAQ Index fell 78% and gave up all the gains it had made.

Recent developments suggest caution is now advisable, as Bloomberg reports:

“Robinhood added more than 3 million funded accounts in the first 4 months of 2020, and half of customers who opened accounts this year said they were first-time investors.. E*Trade  had 329k net new accounts in the first 3 months of the year, with 260k added in March alone..That was more than the company’s previous best annual net record.”

These developments have also led a wave of Instagram-type influencers, such as Dave Portnoy. With 1.5m Twitter followers, his motto is that “stocks only go up”, adding:

“I’m sure Warren Buffett is a great guy but when it comes to stocks he’s washed up. I’m the captain now.”

This group of new traders has been using their $1200 stimulus cheques to gamble on beaten-down but well-known stocks such as Hertz and Chesapeake Energy, as we discussed here on 25 May. But unfortunately for the followers of the new guru, the start of the bankruptcy process usually wipes out the stockholders.

But until then, as those of us who have lived in Texas know, even turkeys can fly in a hurricane.

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pH Outlook team

About The pH Report – Paul Hodges Paul Hodges
Paul Hodges is a Global Expert with the World Economic Forum: he speaks regularly at international conferences and writes for the Financial Times.
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About The pH Report – Daniel de Blocq van Scheltinga Daniël de Blocq van Scheltinga
Daniël de Blocq van Scheltinga Is Hong Kong-based with a background in investment/ corporate banking; he was the first foreigner to run an SOE’s finance department in China.
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David Hughes David Hughes
David Hughes is an expert on the Middle East, and worked in Saudi Arabia for 5 years.
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Paul Satchell Dr Paul W Satchell
Paul Satchell understands financial markets, having been an equity analyst with several leading investment banks.
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Disclaimer

This Research Note has been prepared by IeC for general circulation. The information contained in this Research Note may be retained. It has not been prepared for the benefit of any particular company or client and may not be relied upon by any company or client or other third party. IeC do not give investment advice and are not regulated under the UK Financial Services Act. If, notwithstanding the foregoing, this Research Note is relied upon by any person, IeC does not accept, and disclaims, all liability for loss and damage suffered as a result. The pH Report and pH Outlook are published by IeC. © IeC 2020