Ramblings- 2/1/2016

A lot of interesting data came out today, most of which confirms the obvious, global growth is slowing.

The Atlanta Fed is predicting Q1 GDP growth at 1.2% yoy. Which of course is following a blistering 0.7% growth in 2015 Q4. The US continues to slow.

ISM manufacturing remained in recessionary territory at 48.2
PMI refused to roll over and slightly bounced up to 52.4

Unsurprisingly “hopes” for an oil production cut have faded. OPEC nations can’t agree to cuts, let alone get non-OPEC nations to cut with them. Oil should continue its trend lower and I wouldn’t be surprised if in the next few weeks we hit a new low. Remember, oil at these prices is deadly for producers all over the world.

Even if we don’t hit new lows, oil certainly won’t be rising any time soon in the absence of significant production cuts. Lower for longer is the mantra of this trend, and I’ve been saying it since January 2015. On shore supplies continue to rise. China meanwhile continues to frontload it’s demand purchasing as much oil as it can. However, this will only suppress prices longer, as this it will take longer to work through this excess supply in a slowing economy.

Speaking of China, the PBoC injected $220B to prop up the currency and stock market in the month of January. This is higher than expected but attributable to the Chinese New Year. However, it certainly seems that capital flight in the Middle Kingdom is accelerating. Members of the G20 will meet in Shanghai at the end of February. Perhaps the Chinese will keep the peg stable till then where they will “seek” permission to devalue/float.

China is well on its way to becoming a significant player in geopolitics but a large Yuan devaluation would send shockwaves throughout the financial markets causing massive damage in the fragile economies of the G20. This would obviously be a huge step back for them, which is partly why I believe, the theme for China at Davos was “communication”. China needs to communicate to the developed world what they are going to do so that we can all be better prepared for when they weaken the Yuan.

I am of the belief that they will use the G20 meeting later this month to communicate their need for a weaker currency. So in the case, that we do make it to the meeting without a significant devaluation in the Yuan, I’d be willing to bet that in March the chances of a Yuan devaluation shoot through roof. But don’t take my word for it. Kyle Bass has put his money where his mouth is and invested 85% of his fund into short Yuan and short HKD plays.

The themes of the day are deflation, slow growth, global recession. These trends aren’t going to magically reverse. Central banks cannot wave a magic wand and make this go away. Right now, the only Central Bank with any real power left is the Fed. The world runs on dollars and without more Fed QE, the global economy will shrivel up and die.

 

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