Why this is still the Winter of Disconnect, and the latest rally isn’t Spring as we know it, Jim


The oil price is where Texas needs it to be, not where it should be

While the stock and commodity markets were busy correcting five years of ludicrous over-valuation for most of the last six weeks, the 3% were busy telling us that the markets are insane and “none of this is supported by the data”. After another rally got under way for both stocks and oil yesterday – based on flimsy and forlorn hopes respectively – the data clearly didn’t support it….but by Monday evening Goldman Sachs was saying the worst is over, banks are just fine, and things ‘are returning to nomal’. Which probably explains why Miner Anglo-American lost $5.6bn last year, has stock rated as Division IV junk, and is in my estimation no more than four months away from needing a rights issue. And that’s OK too says Goldin Sacks, because ‘the risk for junk has returned now that investors see the fabulous value they represent’.

The futures say the markets will power ahead again today. But apart from one tentative oil-supply ‘deal’ between the Saudis and Russia this morning – and empty bromides from Mario Draghi yesterday – nothing has changed from last week, when the markets were melting down.

‘Qatar oil cuts disappoint’ says Bloomberg as I write. WhatTF else were they going to do? Did the markets expect Putin to fall on his market share for the good of Texas?

It all depends on whether you think yesterday was about ‘the markets’ alone.

The bank valuations have rebounded – why? Oil is back at $35 – why? The banking sector issues are unsolved, and if oil supply is cut, how will that make demand for it go up? While I said last week that there will be rallies long the way, I freely admit to having been surprised by both the size and suddenness of this one yesterday and overnight. On Sunday, I headlined ‘It’s hard to see anything more than more of the same’. Yesterday I wrote, about the latest rally:

‘On this sort of thinking sits the fate of the world economy. And that economy faces a dire future because of the glaring disconnect that continues between the financialised capitalism of monetarist drivel, and the real global slump out there which, without QE being counted as ‘gdp’, would be even more bleedin’ obvious.’

We are still in the Winter of Disconnect, and this is a false Spring. It is a Spring more false than the Arab Spring. So false, in fact, that I’ve been wondering since Monday mid-morning whether person or persons unknown may have been tampering with the weather. But lest this sound like sour grapes, allow me to restore reality with a few thoughts.

  1. Just one week ago, the International Energy Agency (IEA) had this to say: ‘Having peaked, at a five-year high of 1.6 mb/d in 2015, global oil demand growth is forecast to ease back considerably in 2016, to 1.2 mb/d, pulled down by notable slowdowns in Europe, China and the US. Early elements of the projected slowdown surfaced in Q415.’ Blaming price on supply alone is a con-trick, nothing more: Between Q315 and the current moving daily averages, global demand has fallen from 95.4 to 94.8 to 94.5 million barrels per day.
  2. At first, the claim used was that ‘refined product inventories are not growing’. But it simply is not true. On December 9th, Washington’s Energy Information Administration (EIA) released data showing that ‘distillate inventories’ jumped by five million barrels – double the expected forecast, and the sharpest rise since 1998. That’s diesel road and factory fuels to you and me: a core measure of how business delivery and output are faring. In a word, badly.  Other parts of the EIA report show demand ‘falling an average of 80,000 barrels a day throughout 2015‘.
  3. The stocks/oil rebound narrative today makes frequent use of ‘stimulation bets’ as a key driver. QE has failed everywhere, Nirp is proving a disaster thus far in Japan, and Draghi’s speech yesterday promised that he “would act”…but not what that action might be. (See last night’s satirical post about that one). Well, eurozone economic growth slowed to a four-month low in January, and the French economy remained close to static. But Mario is not as yet starring in the role of Yul Brynner from The Magnificent Seven. The earliest action we can expect is over three weeks away…and his “promise” to act was heavily qualified:

“First, we will examine the strength of the pass-through of low imported inflation to domestic wage and price formation and to inflation expectations. This will depend on the size and the persistence of the fall in oil and commodity prices and the incidence of second-round effects on domestic wages and prices.

“Second, in the light of the recent financial turmoil, we will analyze the state of transmission of our monetary impulses by the financial system and in particular by banks.

“If either of these two factors entail downward risks to price stability, we will not hesitate to act.”

In short, more tricks. All mouth, absent trousers. The faux-bull cow-milkers (if you follow) are directionalising for short-term profit. And the oil business needs the price where it is, because an oil business with oil at $25 a barrel can’t survive. Maybe they’re being given an unseen hand from the Fed on that one…it wouldn’t surprise me. Or anyone else for that matter.

But even Texas with a Ten Yellen hat on can’t outgun the world, and the stocks turnaround cannot last. Already this morning, European indexes suggest it’s running out of steam. Sooner rather than later, the ‘deal’ done by Russia and the Saudis in Qatar earlier today will only amplify the growing problem of waning demand.

This is Crash2, Correction3, rally6 signing off. Time to move on to the next stage.

More liars under The Sloglight: the fiery pants of Jeremy Punt

12 thoughts on “Why this is still the Winter of Disconnect, and the latest rally isn’t Spring as we know it, Jim

  1. ‘“First, we will examine the strength of the pass-through of low imported inflation to domestic wage and price formation and to inflation expectations.’
    Would someone kindly put that statement into clear English for me please?

    Liked by 1 person

  2. ‘Time to move on to the next stage.’

    Which is JW?

    MO is a slow, slow decline into 2020. Negative interest rates in developed economic areas. More QE both outright and hidden.

    Gives the gold acquiring types more time…..

    Intrigued observer


  3. ‘And an oil business with oil at $25 a barrel can’t survive’. It was $10 a barrel in 1986, and Exxon, BP, Shell, and Total are still here. Funny that. And are we about to enter into an economic crash, as opposed to a bear market? Do the maths, the huge income increase from the falling price of petrol, central heating oil and so on across the democratic Northern Hemisphere. We are approaching the early stages of a consumer led BULL MARKET for equities, even if there will be a slaughter down at Nine Elms, and in Central London, for ego priced residential properties.


  4. the stocks Must continue to rise higher and higher no matter what. so bad news is good news as is good news and no news. It has no thing whatsoever to do with the financial situation of the companies involved.. and the higher it goes the lower we all go.


  5. Would it be unrealistic to suppose Yellen could only raise rates because of a flash crash in oil and the recession of a rate rise was avoided. No blame there then for the impending recession …

    But oh dear, oil is now rising, this could be brutal because oil sensitive countries need an increase and that would necessitate the unravelling of the rate hike. Or was this the FED’s plan all along, crash oil, drop rates, now fast raise oil —>>> rise it fast enough trying to crash through the ZIRP barrier and into NIRP?

    Would not surprise me! Guess Yellen did not see that oil has to rise for oil sensitive countries and inevitably there has to be a cut in production to generate it at some point. Such is the connectivity of the petrodollar.

    Liked by 1 person

  6. If gold was really such a bad thing they would not have made the attack on a three day weekend just prior to the monthly options expiration. When you can move something 5 percent up on week only to knock it down 5 the following week you can make a lot of money when you are the person forcing the moves and buy and sell options to benefit. Anyone who believes anything from a banker deserves to be broke. The old joke is they call the guy sell you stocks a broker because the more you listen the broker you get. Goldman and JPMorgan have been on a huge buy silver program. JPMorgan now holds over 60,000,000 oz of silver. Citi and JPMorgan hold each more of the silver market than the hunt brothers when the government via federal reserve and rule changes in the comet decided to ruin them.


  7. It is just before noon, NY time, and oil is back down and near $28. When oil companies bet on $80 a barrel, they die at $40. They didn’t die, that means they borrowed enough to destroy themselves by buying back stock and giving dividends when they are going down. In the hours between when John wrote it, the market gave it all up. They just lost billions but everything is okey dokey. Of course.

    Liked by 1 person

  8. I reckon that Putin used the ‘secret meeting ‘in Doha to position himself for a lovely little short play in oil and or equities. Meeting is held, Saudi Arabia and Russia promise not to pump any more ( they cannot anyway as they are at limits now) and no other oil producing state is involved. So, the Iraqis and Iranians will continue to lift supply into an oversupplied market.
    Result: oil price down to below USD 30! Simples!
    By the way, my contempt of so called oil analysts went up a further notch when one such expert, while expressing disappointment about no cuts being announced, stated that the freeze meant that a base was being put-in. I am not sure whether he was trying to be smart or just chose and unfortunate way to finsih his sentence.


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