Scott Barlow
A roundup of what The Globe and Mail's market strategist Scott Barlow is reading this morning on the Web
A Wall Street Journal report details what, to me, is the best explanation for market volatility so far in 2016 – the speculative, fast money got it wrong and is scrambling to reposition their portfolios,
"A pronounced slowing in China's industrial sector and a steep drop in oil prices have taken investors, business and policy makers by surprise… while U.S. auto production rose last year to meet consumer demand for gas-guzzling light trucks, [Jason Thomas, director of research at Carlyle Group] notes that was more than offset by a collapse in orders for machined parts, precision tools, engines, transmissions, pumps and other "intermediate" goods for the global commodity production chain. Many companies earlier in the chain didn't realize how exposed they were to the commodity bust."
"China, Oil Show Peril of Faulty Assumptions" – Wall Street Journal
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Academic economists in the public sphere are uniformly sceptical, in some cases downright hostile, about the potential positive effects of infrastructure spending on the Canadian economy. Laval University professor Stephen Gordon is among the 'downright hostile,'
"the most recent addition to the dynamic is a wave of press releases from bank economists calling for immediate fiscal stimulus to address the "crisis."… The most remarkable feature of this advice is its lack of sophistication. There are many steps you have to work through before you get to recommending fiscal stimulus, and approximately none of them are addressed in these analyses. The crudest version of this story says that Ottawa should increase spending as a direct response to the fall in oil prices and the resulting depreciation of the Canadian dollar. This narrative is almost certainly wrong: there is no mechanism that I know of by which changes in government spending (a demand response) can offset the effects of changes in oil prices (a supply shock)."
"The government can't 'stimulate' these problems away" – Gordon, Financial Post
See Also: "The problem with using infrastructure to stimulate the economy" – Macleans
"Trudeau Said to Weigh Quicker Stimulus for Hard-Hit Alberta" – Bloomberg
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The U.S.-based Energy Information Agency piled on the gloom for investors in the oil sector in a recent report, noting that producers are 'drowning' in excess crude,
"The oil market faces the prospect of a third successive year when supply will exceed demand by 1 million barrels per day and there will be enormous strain on the ability of the oil system to absorb it efficiently," said the International Energy Agency in its first monthly report of the year."
"Drowning in a Sea of Oil" – WSJ, Across the Curve
"IEA says oil market to remain oversupplied until late 2016" – Reuters
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Economic data in China overnight met expectations but, if there's one statistic for investors to hang their hats on, it's this one (in my opinion, of course),
"Chinese steel production and power generation contracted last year for the first time in at least a quarter of a century, according to official statistics released on Tuesday, as the economy grew at its slowest pace since 1990."
Electrical power growth (along with rail freight volume) has been listed by Chinese insiders as the most accurate indicator of economic growth. The first decline in power usage in a quarter century is an important, negative watershed.
Chinese policy makers are attempting to boost the country's consumption while accepting slower growth in construction. Investors should be very careful, however, with the terms being used to describe data. 'Consumption growth' is good, but 'services growth' is misleading. Services include bank lending and real estate – two areas that will shrink as country moves away from credit-driven construction.
"China annual GDP growth of 6.9% lowest since 1990" – Financial Times
"@TheStalwart Electricity, steel and cement output all down pretty sharply YoY in China. (Via @TomOrlik) pic.twitter.com/JjMAtn4K7P " (includes chart) – Twitter
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Tweet of the Day: "@SBarlow_ROB A very bold sentence on the Canadian dollar climateerinvest.blogspot.in/2016/01/curren… pic.twitter.com/k0MNP3J2Vl – Twitter
Diversion: The Coen Brothers are my favourite directors and this is my links post so, "Watch: Guillermo del Toro Interviews the Coen Brothers" – Wired
Scott Barlow