29 Nov

Global Price Deflation

Categories: Daily Comments

Global Price Deflation

November 26, 2018

Almost every major asset class has peaked from a very high level and the descent will be protracted. The Fed is letting $50 billion a month run off their balance sheet. The ECBs QE program was carrying purchases of 30 bln euros a month through September, until October and November when purchases were reduced to 15 bln euros a month, purchases are supposed to go to zero in December. The Japanese Central Bank is shrinking their balance sheet simultaneously with the ECB and the Fed. The question is, how much will central banks shrink liquidity whilst assets fall?

Economic weakness is evident in the plunge in oil prices, which was exacerbated on the news that the US provided various exemptions from sanctions on Iran. Global oil demand has dipped, led by a slowing of demand from China. OPEC is becoming increasingly irrelevant, especially since the two largest oil producers in world, the US and Russia, are not even members of the OPEC cartel. The largest oil producing nation in OPEC, Saudi Arabia, continues to increase production to appease American counterparts and pressure Iran. Russia does not want to lose market share, so it will also continue to increase production creating a long term supply glut.

Sclerotic industrial activity is also evidenced by the drop in industrial commodities prices throughout the second half of this year, especially metals: aluminum, zink, copper, lead, tin and nickel are all down significantly. Global equity markets are showing signs of rotation into staples as investors seek conservative alternatives. The broadest equity measure, the MSCI All-Country World Index, peaked in January. The dollar has been rising for the last six months against the euro, yen and cable as a result of risk aversion and preferential US bond differentials.

Pundits are ignorantly optimistic about the prospect of a deal between Xi and Trump at the G20. The US administration and Chinese Communist Party are fundamentally juxtaposed and neither will concede for years. The Communist Party cannot allow market forces or liberal ideologies to exist on the mainland because these forces will erode communist power over time. As the two largest economies in the world split, the globalization of trade will disintegrate as nations align themselves economically and politically with either democratic or communist institutions. This undoing will be negative for corporate profit growth as manufacturing and distribution processes become more localized.

Investors should move to protect asset values first with conservative investments like high grade corporate bonds, US Treasuries, VIX, cash, land and precious metals. Global equity and industrial commodity markets will continue to perform badly in a global deflationary environment over the years ahead.




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