Based on last week’s developments, which included the launch of an investigation into the world’s largest oil company and the rejection of the most politicized energy project to date, the “above ground” problems for the energy industry are growing much worse. That could complicate the future fortunes of oil and gas companies.
Since either NIRP, or QE, or most likely both, are about to cross the Atlantic and make landfall in the US before the Fed is forced to launch the monetary helicopter, those who want to know what is really coming - no, not rate hikes - are urged to read this.
For the past two weeks, the thinking probably went that if only the biggest short squeeze in history and the most "whiplashy" move since 2009 sends stocks high enough, the global economy will forget it is grinding toward recession with each passing day (and that the Fed are just looking for a 2-handle on the S&P and a 1-handle on the VIX before resuming with the rate hike rhetoric). Unfortunately, that's not how it worked out, and overnight we got abysmal economic data first from China, whose imports imploded, then the UK, which posted its first deflation CPI print since April, and finally from Germany, where the ZEW expectation surve tumbled from 12.1 to barely positive, printing at just 1.9 far below the 6.5 expected.
Wwith oil volatility surging in recent months, oil producers needed to take advantage of a rally, technical or otherwise, and an oil vol lull to reestablish hedges, even if it meant at far lower prices than recent benchmarks. This is precisely what happened in the past week following one of the most torrid surges in the price of oil seen in recent years.
While the US bond market, if not equities, is enjoying the day off on a day in which there is no economic data just more Fed speakers including the Fed's Evans who on Friday uttered what may be the dumbest thing a central planner has ever said, the week's macro docket starts in earnest on Tuesday when China releases much anticipated September trade data. Here are the key events for the rest of the week.
BIS Warns of ‘Major Faultlines' In Global Debt Bubble - "Unrealistic and dangerous to expect that monetary policy can cure all the global economy’s ills"
It's no secret that Brazil was long expected to be the epicenter of any future EM crisis just as it was, in many ways, the picture of EM success during better times. That said, even we’ve been surprised with the pace at which the situation has deteriorated and in the wake of the S&P downgrade the market is now left to ponder just how much worse things can get. According to Goldman the list of obstacles is laughably long.
Perception is everything in contemporary economics and the Fed is the center of perception; the medium has become the message. The truth is more this: the Fed no longer reacts to the waxing and waning of animal spirit-led demand. In the current monetary regime it exists to create and maintain animal spirits with a secular policy centered on ever-expanding credit, but it is very aware that admitting it’s centrality would defeat its purpose.
Today, much of the world turns its lonely eyes to the Fed and its chieftain. The Fed has as much as promised to make the blind see and the lame walk. It claims that it – and it alone – is capable of improving the U.S. economy and, by extension, the world economy. People will earn more money. They will live better. And they will have less to fear from financial calamities, such as those that happened before the Fed was set up in 1913. In the popular mind – if there is such a thing – it is further believed that the Fed “won’t allow” a major bear market, because “it would be bad for the economy.” The Fed rules the entire universe of commerce, finance, and investment. Janet Yellen rules the Fed. But who rules Janet Yellen?
Will Janet Yellen proudly put the Fed on the side of the angels, announcing that she and her crew have decided to move the Fed’s key interest rate to a more normal level… regardless of how much it costs the cronies? No, she won’t. Once you begin manipulating markets, it’s a hard habit to break. After nearly seven years of emergency financial policies, we are now in a permanent emergency..."What if they say it’s my fault? What if they call it the Yellen Depression? Oh, no... It’s not fair... It’s not fair... Boo-hoo... sob... sob... I should have stayed at Harvard. I’d have tenure. I’d have a nice pension. George and I could go the Martha’s Vineyard in the summer. It would be such a nice life."
The growing roar of 'the establishment' crying for help from The Fed should make investors nervous. While your friendly local asset-getherer and TV-talking-head will proclaim how a rate-hike is so positive for the economy and stocks, we wonder why it is that The IMF, The World Bank, Larry Summers (twice), Goldman Sachs, China (twice), and now no lessor nobel-winner than Paul Krugman has demanded that The Fed not hike rates for fear of - generally speaking - "panic and turmoil," however, as Krugman notes, “I think it would be a terrible mistake to move. But I’m not confident that they won’t make a mistake."
When it comes to crisis, SocGen notes that there is an abundance of case studies; and against the backdrop of the uncertainty shock delivered by China and the subsequent market tumult, market participants have been looking to the history books for clues as to what could happen next. While individual crises create their own risks, SocGen warns, the overriding risk is that markets are taking less comfort today from the idea that central banks may step in with further QE-style liquidity injections to save the world.
For anyone who (still) believes that Canada has a diversified economy...
All eyes will be on Mario Draghi on Thursday as expectations for something big from the former Goldmanite have grown over the past two weeks. More specifically, some now think the odds of QE expansion have increased considerably in light of collapsing eurozone inflation expectations, the incipient threat of some $1 trillion in QE-offsetting EM FX reserve draw downs, turmoil in China's financial markets, heightened volatility across the globe, and chaos in emerging markets from LatAm to AsiaPac.
Then - "We will not have any more crashes in our time." – John Maynard Keynes (1927)
Now - "Ambarella, GoPro & FitBit are headed higher" - Jim Cramer (7/22)