Economic trend lines

The big economic trends at the start of the New Year were diving oil prices, rising gold prices and extreme equity market volatility. As February draws to a close, each of those trends lines have reversed. Why? Where are they headed? What will or can change them?

On the oil front, the issue remains the same: too much supply and sinking global demand. Nevertheless, oil prices have bounced off their January lows on reports of sharp cutbacks in production and exploration. Therefore, the fundamentals of the economy remain unsound. Prices are not rising as a result of manufacturing and consumer demand, but rather because of energy industry attempts to restrict supply. Although Brent Crude is up more than $10 and trading in the $60 per barrel range as we go to press, it is still well off the $115 per barrel mark it hit in June 2014, when prices began their steady slide. While prices can be manipulated, without strong economic growth (which we do not forecast), and absent a geopolitical oil-related shock (which no one can predict), oil will not return to its 2014 highs. Should prices substantially weaken, it will signal the onset of a severe economic shock.

Gold, down over $100 per ounce, has lost much of its New Year’s glow. With equity markets in turmoil, oil prices tanking and geopolitical tensions in Ukraine and the Middle East building, gold’s safe-haven allure was pushing the price higher. However, since the European Central Bank launched its massive $1.3 trillion QE scheme in late January, with better than expected employment data from the States, a brokered ceasefire in Ukraine and oil prices firming, signs of a stable socio-economic climate have taken the glow off gold prices. Yet demand for physical gold continues to rise as central banks, particularly Russia and China, stock their vaults with the precious metal. Thus, while gold prices will continue to fluctuate, our long-term forecast remains bullish as geopolitical turmoil increases, economies weaken and equity markets begin their steep decline from artificially induced highs.

Japan’s stock market is up nearly 60 percent after two years and two rounds of its cheap money/Abenomic-QE deal were put into play. But while the markets have boomed, Japan’s Gross Domestic Product is lower today than it was in 2012. In anticipation of European Central Bank Chairman Mario Draghi doing “whatever it takes” to whip deflation and boost economic growth with a massive money injection-low interest rate policy, European stocks are at seven year highs, yet overall Eurogroup GDP continues to sag. Throughout Europe, non euro-currency central banks have, in some cases, lowered rates into negative territory. And in the States, thanks to some $4 trillion of QE flows followed by a continuation of record-low interest rates, the borrow-money-cheaply-and-gamble-big-in-the-stock-markets racket has pushed the Dow to new highs as well. Yet life in the equity market casinos bears no resemblance to life on the streets. When will reality hit the markets and the Ponzi scheme end? About a year ago we forecast the market would dive, in anticipation of the Fed’s signal that it would raise rates. However, with U.S. GDP growth for 2014 at a tepid 2.4 percent, the Fed continues its call for rate-hike “patience.” When rates eventually rise, debt service payments will increase and the asset bubbles inflated by the world’s central banks will deflate.

In the absence of strong economic growth, which we do not forecast, the equity market bubble will burst. When? We believe it will be sooner rather than later. However, we have no inside knowledge to determine what new schemes-undreamed-of will be hatched by the central banks and governments to keep the easy money flowing.