US-EU Trade Slowdown?

In December 2015, oil tankers made u-turns while crossing the Atlantic [ZHOIL]. In March 2016 the mayor German rail carrier announced a 8-10% percent drop in fright shipments for 2015 [RG]. In April 2016 its cheaper to rent a dry bulk tanker than a Ferrari F40 [ZHTANKER].

European capital markets started weak this year, recovered to their highs again while the US dollar weakened during Q1 2016. Are US and Europe's economies are healthy?

(Side note: As TTIP is coming back onto the agendas of the media, political parties, NGOs, investors and companies. Why should a rigid trade deal be made, when the benefits are small but the risks of loosing national sovereignty is high while the future economic situation is very uncertain? Maybe some oligarchs try to secure their power before historic changes are happening?)

US-EU Trade
The first industry which feels a slow down in the (world) economy is the logistic  sector. This early indicator worked like charm the last 2 crisis. Now its crashing and the media seems not to notice. If the US economy slows the first countries which feels it is Germany and China.

US slows scenario? 
The trillion dollar fracking industry slowed in 2014 after the easy QE money was gone. As debt refinancing got harder they were forced to pump for their lives, taking down natural gas prices and than oil prices. As Saudi Arabia did not play the marginal producer anymore the oil prices collapsed in 2015. Yet the US middle class did not recover from the housing bust in 2007 and piled up lots of student and car debt, so demand is still weak (look at total Christmas retail sales). The rate hike in December killed the last offspring’s the US economy had.

As oil prices are down and the rate increased in December 2015, fracker refinancing got even harder and they had to lay-off people. Also the bank balance sheets might be full of deteriorating fracker debt. Lay-offs further weakens the US consumer demand which weakens China's producers, their CapEx and machinery manufactures like Germany. These demand fewer raw products causing commodities to crash and require less transport services [ZHCHINA].
Now the Fed rate hikes seems on halt and reverse becomes more likely. The oil price is going up from the lows and may revive the fracking industry again. The upward oil price move looks for some like a oil short squeeze, others think its a trend reversal and I believe its a retreat strategy as crushing the Russian oil exporters was not successful, hurting the debt-laden oil producers of the west and their allies more than initially planed.

All that happens at a time when global financial flows are changing direction. The the petro dollar is reversing, the Asia merchandise dollar is very week and the liquidation of assets of sovereign wealth funds [ZHNOR] requires to re-allocate assets.

With this much turmoil cooking just below the surface, the release of the Panama Papers smells like an intelligence operation. East? West? Who benefits? Its not clear yet. But a freighting message is launched to all oligarchs of the world: "We know where your money is and we can take you down at will.".

Nobody knows what will happen next. Yet you can position yourself to loose less or even benefit from any events unfolding. We are in front of a historic rift where fortunes are made and lost!

History does not repeat but it does rhyme and a word of caution!
In 2008, banks did not trust each other, causing the global financial flows to stopped, which caused a nearly complete halt of the global trade / transport. At that time ships were waiting in ports to get the money for their fuel.

In 2016 the freeze of global trade comes from the other side of the equation. The trade collapses because nobody can consume all the produced goods. This causes a slowdown in the real economy infecting the financial economy. The huge problem is that real economy is sick of overcapacity caused by debt. As debt is future cash flow moved to today, the debt (and its overcapacity) has to written off. This will cause a lot of rich people to loose money and poor people to loose jobs. In the past this dynamic lead to revolutions and wars.

Note: Macro influence on value investing
As value investor I base my investment decisions on bottom up analysis! Talking about macro is like talking about the healing abilities of traditional Asian medicine or yoga in front of hospital medical staff. It's awkward for all. 

Bottom up approach is like the doctors and nurses in front of their patient. They have to make decisions based on data of the patient in front of them. Top down is more like traditional Asian medicine. It is focused on a general healthy life style.

How to prevent heart attack? Follow traditional Asian medicine. Who do you call when having a heart attack? The hospital. It's kind of a barbell strategy for all Nassim Taleb fan boys and girls among us: Live healthy for almost all time, but sometimes when your are ill take drugs at (advised) high doses.*
*: Bonus question for Taleb fan boys and girls: How would a Gaussian bell strategy look like? A Gaussian bell strategy is to live less healthy because you live healthy but you take toxic drugs at low doses all the time, even if you are not ill.

[RG] http://www.railwaygazette.com/news/single-view/view/db-needs-quality-quality-and-more-quality-to-return-to-economic-success.html (Comment: the train driver strike was just a few days, but indicated that they strike 1+ month. The strike alone does not explain the whole drop.)
[ZHCHINA] http://www.zerohedge.com/news/2016-04-18/china-ocean-freight-index-collapses-record-low
[ZHNOR] http://www.zerohedge.com/news/2015-10-09/another-petro-state-throws-towel-last-nail-petrodollar-coffin
[ZHOIL] http://www.zerohedge.com/news/2015-12-16/something-strange-taking-place-middle-atlantic-ocean
[ZHTANKER] http://www.zerohedge.com/news/2016-04-23/its-now-cheaper-buy-dry-bulk-freight-tanker-starbucks-coffee

Kommentare

  1. Interesting post.

    "The huge problem is that real economy is sick of overcapacity caused by debt."

    Try to tell that to Draghi, or some other "expert". These guys are always talking about demand shortage... it is really interesting, how people with so little economic knowledge get the jobs at the top. Can they really be this dumb? Or do they have different goals, than officially stated?

    "In the past this dynamic lead to revolutions and wars."

    Somehow one is frightened of such a scenario. On the other hand, something has to happen... hopefully, the worst case is "depression only".

    Best,
    Tom

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    1. "Can they really be this dumb? Or do they have different goals, than officially stated?"

      In my opinion, they are intelligent but shaped / forced by their environment to do stupid things. On top of that they do not have the guts to change directions because they changed their opinion. This would require personal responsibility. They are all bureaucrats playing the institutional politics play book. On the other hand inflating asset prices creates the "wealth effect" for the super rich, which holds enormous power within the western political system. As long as asset prices go up, the powerful are happy thinking they got richer and keep their "elected" representatives in political power.

      "worst case is "depression only""

      Lets think about it. You have people who want to get richer. First the want-to-get rich strip of the stupid from their wealth. Now there is a small wealth gap: there are poor and rich. In the next round, the powerless are stripped of their assets. Than the little bit more power full are stripped and so on. This dynamic reinforces itself. At one point the super rich strip of each other. In a functioning society, this devils circle gets broken - let super rich fail with their banks, redistribute income and wealth. If this is not happening a war dynamic can be set off, because rich from one country try to strip of rich from another country. As they can influence politicians on both sides, war between countries might be caused.

      A similar dynamic happens within the country as more and more income from the people flows to few super rich. If this happens to a large degree revolution might occur.

      I looked at the downfall of past empires. At first they have order within their country and project order outwards. Their influence on other countries increases. This creates order within the countries but also creates a dependency of the country to the empire. This new order unleashes economic development and the total wealth grows fast, everybody benefits and trade increases. A win-win for empire and vassals.

      At some point the trade benefits begin to marginalize and not all vassals have a net benefit because they incur cost by the empire (see below where the costs are generated). The empire gets challenged by uprising vassals, which want their relationship to the empire renegotiated. At first projecting soft power is enough to keep the order of the empire intact (near 0 costs). Than they have to use economic power (sanctions, trade barriers, trade partnerships -> TTIP) to project power onto others (more costly). The last stage is projecting military power (extremely costly) which most of the cost is carried by the empire (the empire has the biggest military). To finance the projection of order onto other the vassals have to pay. This creates further uprising among the vassals and the empire dissolves.

      I believe we are right before the last stage, just before the dissolve begins to be visible and I see no renegotiation of the empire-vassal relationship.

      We were at a similar point in 1970-80 after the oil crisis and stagnation of the West. The relationship between the West empire and vassals got renegotiated (by the pressure of the alternative USSR-System). This caused the ending of the Gold Dollar (so that Paper Dollar could finance war) and the end of the Vietnam war (to reduce cost carried by the vassals), social reforms to keep the society stable and opening up of Asia (first Japan, than East Asia and China) for future growth.

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