Friday, 8 January 2016

Weak week. Waiting.

We are now a week into 2016 and due to the small sample set we can take the week’s moves and also quote them as the month's and year’s moves. Hence promoting "we are down x% for the week" into "down x% for the year", making it sound like a long trend rather than a week's noise.

The year has indeed started with a clatter and though my last post’s musings of what might happen in 2016 included a start of the year dump and references to Saudi Arabia being the lynchpin (or grenade pin) for 2016, I didn't anticipate them being THE themes of the first trading day. Throw in Chinese stock price action, a fall in CNY,  a continuing collapse in oil and all you are missing is a Greek Crisis to have every poltergeist of 2015 returning to scare the heck out of the market.

I have done very little since the end of November and likewise have had little to say. But the extremis of market gloom does appear to be outstripping reality. Now before you start listing all the bad things in the world as evidence supporting the case of my naïvety - I KNOW. But the speed of the flip would imply that we have a crisis on our hands.

But let's separate out a market crisis from an economic crisis. A market crisis can occur when all else is fine but there is a sudden repricing to a new reality. In this case it's anticipation of higher US rates and an anticipation of Chinese demand collapsing. An economic crisis is when growth collapses, people lose their jobs in droves and there is no money to be had. A financial crisis becomes an economic crisis when money stops flowing around the system. Panicking that there will be an economic crisis caused by a financial crisis itself caused by tightening rates, tightened because there is less chance of an economic crisis, and thinking there would be no back tracking on policy to counter both crises strikes me as absurd. I am still convinced that if we got to that state then more money would be printed and injected.

But Western economies are not collapsing although the media do their best to convince us that they are. Notable was the BBC headlining, yes headlining, a -0.1% revision to UK GDP. Unemployment figures in the west are improving. The US NFPs were storming today and the European PIGS are putting in steady improvement figures

H/T  for the chart

It isn’t a melt down. In fact the paradox is that if the US economy was in dire straights the Fed wouldn’t be telling us so clearly that they will be raising rates 4 times this year.  If this is an economic crisis you can forget the Fed hikes, but it isn’t. It’s a market adjustment (and not yet a crisis). The US economy is doing fine, as is the UK, with service industries growing strongly.

At this point someone says that’s the problem. Our manufacturing sectors are out of balance with services and manufacturing is not showing a recovery normally associated with a 'proper' recovery and it's an imbalance needs to be addressed. When I ask people why it needs to be addressed I usually get a reply along the lines of .. well.. that's the way it has always been.

The UK is the second largest exporter of services in the world and the US economy is currently 88% services. In a competitive world it is better to export high value goods rather than low value goods unless you can make those low value goods at such low prices that (price x volume) =  big. Whilst there are countries with populations willing to accept lower wages than us for their day’s work we have to sell goods they can’t. And that is now mostly services.

A case in point is my recent purchase online for one of the kids. A new mouse and external CD/DVD RW Drive. The mouse contains a laser, interferometer, micro computer, wheels, buttons wires and a USB socket. The DVD RW thing contains technology thet could probably have run the Apollo 11 moon landings.  Cost to me, including shipping?

Mouse £0.99. Apollo launching DVD RW £6.99.

Yes this Darth-turbo mouse cost less than 10 minutes of a UK minimum wage, including shipping. I cannot imagine any UK manufacturing plant able to turn out a mouse and a CD DVD RW drive, including shipping, on just an hour’s worth of UK minimum wage labour. My local garage tries to charge £90/hr just to change a wiper blade. So lets stop bothering and keep exporting the high value services.

Once upon a time the UK’s agricultural industry accounted for 90% of the country's economy. It is now about 3%. Should we readjust back to that too for nostalgias sake? As long as we are exporting services that pay for the lower valued manufacturing stuff we buy in then that's fine. Yet services are lost in the data.  The historic way of measuring trade data demotes many services into the invisibles part of  the equation leaving attention resting on the more obvious manufacturing figures. It is worth listening to this excellent BBC radio program ‘making the invisibles visible’ which was out last summer.

But back to markets. China kicked all this off again with a late fall in asset prices on Monday. No new news, just restrictions on shorts being lifted and the rich racing to take their money offshore, apparently. China’s currency has been in the headlines again as it has been allowed to weaken prompting new terror over a massive devaluation upsetting the region. But note that though USD/CNY has strengthened, against its trade weighted basket it is still in the normal range (just). This is best expressed by my old mucker, alter ego and Alma Mater - Macro Man here

Western equities prices are moving. I know that sounds obvious but there has been little else this week to drive that move other than other (Chinese) equity prices moving. But emerging markets are beginning to look cheap (ignoring Southern Africa) however trying to persuade anyone to listen to that narrative in a January is utterly pointless. We are at that point where the man in the crowd with the pitchfork waves it in the torch light at the castle and leads the charge up the hill -  only next to be seen as a town gate pole decoration. January the 19th is still my mythical turn date but I may bring that forward as sentiment is already extreme. Let's see what Tuesday brings.

Oil - This is it folks, we are at that famous economic point called the front leg of the bauhaus chair of supply and demand.

Saudi Arabia has indeed become the centre of attention and a new Iran / Saudi spat has blown up. But this isn't as clear cut as previous spats where the guy in the white is always seen as the goodie. My thoughts on how this one is different will have to wait for another post but suffice it to say that old allegiances are being sorely tested and will change as the fog of complexity in proxy wars becomes even denser. Saudi and Iran are as much proxies to other superpower battles as various Middle East factions are to Iran and Saudi's own spats. 

One last reference to one of my 'calls for 2016' - that sanctions against Russia will be slackened -

As I go to post this, US markets are having another bad close so I remain sitting on my hands. I am not going to sell risk and still wait to buy it. Roll on Jan 19th. 


Unknown said...

Great post - again.
Totally agree on the services vs manufacturing point. I had an argument once with someone who was complaining about that for the US economy - "we are not producing anything anymore - everything is made in China - even iphones are made in China these days!". So more or less he was indirectly arguing in favor of people working for a fraction of current US minimum wage in manufacturing, instead of the high value add design and development of that product. Yet this is somehow perceived by a large part of the population as the right thing to do to avoid the country and the economy collapsing. Insane.

- theta

Anonymous said...

Polemic -

As always spot on. A seasoned market players balanced view - somewhere between Zero Hedge/Nico G and JBTFD. As you say roll on Jan 19th. Interesting that there's no sign of institutional panic. More a dull acceptance that we were overdue a correction.


Eddie said...


do you have any idea how much of services is induced/driven by manufacturing? My reasoning is that to repair an iPhone, say, (services) someone has to produce it in the first place (manufacturing). Now if manufacturing sucks will that impact services in the medium term (in the past it did... services ISM usually went south a quarter or so after the manufacturing ISM) or is it indeed different this time?

Polemic said...

Eddie, I don't know, but that is opening up the debate to GLOBAL services vs manufacturing as it doesn't matter where the phone was made for it to still need to need a repair. The complaints I hear aren't about the global balance between manufacturing and services, but the local distribution of them. e.g. Design iPhone in US, make it in China. Yes in the ism following manu but globalisation changing that. have to look at global manufacturing. But another point is the measure. Should manufactured goods be measured as price or volume. If iPhones were free manufacturing income would be tiny but need for services around them would be high. In the past services Ism was related to servicing those who made things. ( i.e. the bar selling the factory worker beer). We are passed that now, with coffee shops servicing IT programmers who are also services. Go back to that problem of distinguishing a product as a service or a manufactured thing. Programming/coding for example?

If we had pluto come along and offer us on Earth every manufactured good we wanted, for free, would the economy on Earth go bust? No. We would all expand to provide each other with services that pluto couldn't provide.

interestingly, take that argument one stage further and suggest Pluto provided all services for free too, then the economy would die ....but only because we didn't need an economy anymore, so it wouldn't matter.

Polemic said...

and thanks Theta and Ang

Eddie said...


I had the point about global manufacturing in the back of my head when I mentioned the iPhone (applies also to steel for example, so not only high tech). For simplicity's sake we can look only at the US and China (throw in Germany if you are in to cars) for the manufacturing part. Germany is doing well lately, the US and China not that much. So you could continue to wring your hands.

The point about where manufacturing ends and services begin is a very valid one. I tried to come up with examples where services are not tied to manufacturing in the end (the programmer writes some code to control a plant, say), but besides the financial industry in the wider sense, including insurance companies, nothing came to mind. I still struggle with the idea of services in a vacuum (outside banking).

Unknown said...

How about education? Tourism (travel services, restaurants)? Performing arts? Haircuts? Massages? Spas? Gardeners? Etc etc.
Whereas on the other hand banking services can be more tied to manufacturing, if they are services of arranging financing for a manufacturing plant for example.

- theta

Eddie said...


all good examples but not the high-growth stuff I had in mind. Yes, we can cut each others hair all day long and pass the same buck back and forth but business growth is basically equal to population growth. Same reasoning for education. And you probably don't want to make a living as performing artist... unless your last name is Clooney or the like.

Software and programming fits best so far. Every four years or so (depends of course, but to have something at hand) you have to upgrade your software, so there is a recurring demand plus you may enter into new markets that didn't exist before (think smartphones for example). Maybe not for each single company (there is a world beyond MSFT) but overall. But software alone won't deliver those 2% GDP per year.

USIKPA said...


Brilliant bauhaus chair. The question is though how can one be sure that this is it, folks?

Polemic said...

USIKPA. Of course you are right, we can t be sure but the recent price action in the stocks of marginal producers looks as though they are going to fold very very soon.

USIKPA said...

Well, SWN and CHK are off the lows. As for your favourites (PMO,TLW), these follow the brent price action to the dot, so might as well be saved by any re-tracement.

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