Brent Plunge To $60 If OPEC Fails To Cut, Junk Bond Rout, Default Cycle, "Profit Recession" To FollowSubmitted by Tyler Durden on 11/24/2014 10:11 -0500
While OPEC has been mostly irrelevant in the past 5 years as a result of Saudi Arabia's recurring cartel-busting moves, which have seen the oil exporter frequently align with the US instead of with its OPEC "peers", and thanks to central banks flooding the market with liquidity helping crude prices remain high regardless of where actual global spot or future demand was, this Thanksgiving traders will be periodically resurfacing from a Tryptophan coma and refreshing their favorite headline news service for updates from Vienna, where a failure by OPEC to implement a significant output cut could send oil prices could plunging to $60 a barrel according to Reuters citing "market players" say.
"Even if economic conditions continue improving, equity prices are bound to fall sharply at some point, inflicting painful losses on investors. This is what happened in 1987, roughly five years into the last structural bull market. Boom-bust cycles are inevitable because improving economic conditions encourage speculative excesses, which are then blown away as greed gives way to fear."
With hopes high, at least among corner offices of the majors, that this week's OPEC meeting will somehow manage to slow down the biggest plunge in crude prices since Lehman, it will take much more than mere talk and hollow promises to offset the recent cartel-busting actions of Saudi Arabia. So in a worst case scenario where supply remains unchanged even as global energy demand continues to decline sharply due to the ongoing global slowdown what is the worst case scenario that could happen - aside from the mass energy HY defaults discussed previously - should the price of a barrel of oil continue to correlate the change in 2014 global GDP estimated? Here are some thoughts from Deutsche Bank.
Anyone who looks at central bankers speak can sense the fear behind their absurd bravado, and the dishonesty of their public confidence.
The global financial system has come unglued. Everywhere the real world evidence points to cooling growth, faltering investment, slowing trade, vast excess industrial capacity, peak private debt, public fiscal exhaustion, currency wars, intensified politico-military conflict and an unprecedented disconnect between debt-saturated real economies and irrationally exuberant financial markets.
Here we go again. By now everyone, including 2 year old E-trade babies and Atari algos know, that the only reason the market soared from the October 15 bottom, a move which we showed was entirely due to multiple expansion and thus nothing to do with earnings and everything to do with faith in even more free central-planning liquidity (something the PBOC was all too happy to provide overnight), was James Bullard's casual "QE4" hint on Bloomberg TV. And now that the market is at ridiculous all time highs and trading above 19x GAAP PE, far above the level when in September the IMF, the G-20, the BIS and even the Fed all warned of assets bubbles, here is Bullard once again, with a fresh mea culpa and a new attempt to jawbone stocks, only this time back down, because as Dow Jones reports, "Bullard Says Markets Misread Him In October Bond-Buying Dustup."
While the biggest news of the day will certainly be China's rate cut (and the Dutch secret gold repatriation but more on the shortly), here is a list of all the other central-banking/planning events which have moved markets overnight, because in the new normal it no longer is about any news or fundamentals, it is all about the destruction of the value of money and the matched increase in nominal asset values.
Are you waiting for the next major wave of the global economic collapse to strike? Well, you might want to start paying attention again. Three of the ten largest economies on the planet have already fallen into recession, and there are very serious warning signs coming from several other global economic powerhouses.
The topic of ‘currency war’ has been bantered about in financial circles since at least the term was first used by Brazilian Finance Minister Guido Mantega in September 2010. Recently, the currency war has escalated, and a ‘sanctions war’ against Russia has broken out. History suggests that financial assets are highly unlikely to preserve investors’ real purchasing power in this inhospitable international environment, due in part to the associated currency crises, which will catalyse at least a partial international remonetisation of gold. Vladimir Putin, under pressure from economic sanctions, may calculate that now is the time to play his ‘gold card’.
Because nothing says rational human stock-buying like the entire world's PMIs collapsing to multi-month lows. Thank the lord of the markets for AUDJPY which took over the mantle from USDJPY as US equities opened... Of course, it is OPEX tomorrow, so this all makes perfect sense. Now all we need is for a stock exchange to break and the unrigged game is complete...
Recovery, we have a problem... November's Flash US Manufacturing PMI printed a 10-month lows 54.7, missing expectation sof 56.3 by the most on record and tumbling for the third month in a row. The last 2 mnths have seen the biggest drop since June 2013 ands as Markit notes, suggests a further drop in GDP growth expectations of only 2.5% in Q4. Output is down for the 3rd straight month and Surprise!! Export market weakness is being blamed... as it seems the US cannot decouple from the rest of the world's slump after all and is - as we have explained numerous times - merely on a lagged cycle. We're gonna need more Fed-fueled subprime-auto-loan malarkey to keep this dream alive.
"QE is a necessary condition for recovery in Europe, but is not sufficient in itself. The question is where does this bridge take us? The eurozone can survive a couple more years of miserable growth, but it can’t go on forever like this before people lose hope. There is political risk almost everywhere."
Unfortunately, Natixis warns, the same error is being repeated by the Bank of Japan. The starting point of their analysis is the contrarian fact that Japan needs a strong yen. Japanese exports are hardly sensitive to their prices; Japan has a large proportion of "necessary" imports (commodities) whose price rises when the yen weakens. Unfortunately, Natixis warns, the Bank of Japan has just increased the size of its quantitative easing program, which will lead to a steeper depreciation of the yen. The only benefit will be a temporary rise in the Nikkei, an automatic result of the conversion of Japanese companies' results into yen. Nothing more...
Keynesian fiscal policies and central banking regimes have buried the public sectors of most of the world’s major economies in unsustainable debt. Now they propose to double down on more of the same because an entire generation of politicians have been house-trained in permanent fiscal profligacy and endless kicking of the fiscal can down the road. To be sure, in perhaps putting off Japan’s day of fiscal reckoning once again, Prime Minister Abe is proving himself to be a certifiable madman. In short order, however, he will have plenty of company all around the planet.
The BTFDippier of the fast money is already rotating into a long-Europe mode: their entire thesis is that sooner or later the whales will have no choice but to follow the momentum chasers right back into Europe, because where else are they going to go: in the "safety" of the S&P's 19x GAAP P/E? In theory this would be a great strategy, if only in a world in which nobody actually does any fundamental homework and the only thing that matters is frontrunning the next great sucker. In practice, it is fatally wrong. As the following observation from hedge fund Lyxor shows, while CTA and momentum strats have indeed bailed on Europe in recent months, the so-called smart money, the "global macro" funds never left.