Fed Dovish, but Will Yellen’s Bull Fly?
Today the head of the Federal reserve Bank, Janet Yellen, appeared with her predecessors to report that the economy was on track. The general idea behind her statement to the press was that there has been some inflation and less unemployment, so they are going to stay the course to cautiously increase interest rates as planned. Everything’s going great!
It might be a bit naive of me to suggest, but just how in the hell is that conclusion made in the face of a massive contraction in the world economy? It’s recently been reported that fundamental metrics of such shrinkage are virtually everywhere you care to look.
Just in the United States it was recently reported that class 8 truck purchases are slowing dramatically at just over 60% their normal pace. Class 8 trucks are those lumbering giants with the 18 screaming wheels that scare the hell out of other drivers because their operators tend to be over-worked and are famously sleepy. Not everyone sees them in that light, of course. There are plenty of raspy-voiced RJ Reynolds and Philip Morris consumers who work as entrepreneurs in the industry of short-term highway leisure that I imagine quite enjoy their arrival because it means a few more Miller Hi-lifes. But with less industry generally, there is less freight to haul, and less of these drivers working, which means less need for the purchase of those kinds of vehicles. That means less Miller Hi-life, amongst other things.
Miller Hi-lifes are the least of our collective worries, but with shit rolling downhill as it does, the Hi-Life stands as an example of the connectedness of the different markets of the world and how the slowing of the global economy will effect absolutely everything.
Following a different thread of the web that binds it all together, China’s slowing economy is having a huge effect on the greater global economy. The entire Chinese economy is winding down slowly. What that means is less demand for materials and less trade with the countries that provide such materials. There are all kinds of materials that will be in lower demand, but the one that really makes the world spin, of course, is oil. When demand slows, supply balloons and prices fall. With a country the size of China having a slow-down, their lower demand for oil can sink prices all by itself for the rest of the world.
Demand for oil pushes the price up and signals that a lot of money is changing hands everywhere. People are doing things, building stuff, going places, killing each other, everyone’s staying busy somehow. But when the price falls, demand is falling, it means less people are doing stuff. Less is happening generally: less buying and selling, less money changing hands, and very quiet markets. Without activity it’s very difficult to have any growth/inflation, and that’s just the general tone of the markets.
Consider industries competing with oil for market share of the energy sector. The infrastructure of the world is built around the availability of oil. You can find places to gas up your car virtually everywhere you go where I live in Los Angeles. I have a plug-in hybrid car so I don’t have to gas this thing up. I can plug it in and save the cash, but it’s pretty hard to say no when I’m paying $2.30 a gallon like it’s 1998 or something. Being that the infrastructure isn’t quite up to being able to service the increasing demand of all the electrical cars (you really have to do some searching), if it’s this cheap and there are gas stations all over the place then I’m buying gas. I’m just one out of thousands and thousands of people like me in this one city alone, and that means competing energy sources see their prices fall, too.
Everyone makes less and less money all down the line, from the very bottom to the very top. Tracking it all the way back to the wells in the Middle East, they have to keep producing oil despite the diminishing demand. If they slow down then they lose their market share, they don’t make any money at all. They have to produce more to make the same profit as they did when there was more demand and they could call a higher price, but as the price falls they can’t slow down. Particularly today there are even more reasons why they have to stay on the avant guard. ISIS is running around the oil wells of northern Iraq stealing oil and selling it so cheap that they’re even doing business with their enemies. They have virtually no overhead. This is another factor out of many driving the price into the floor, but what happens when finally they can slow production? How much oil have they already produced beyond demand? How long will it take to burn through the surplus to bring us back to where we’re supposed to be? It’s hard to say what a bind they’re really in, but reactionary markets have shown that all anyone needs to hear is that they MIGHT slow and it’s enough to put markets into overdrive. But, that only lasts so long.
That last little rally there happened because someone, somewhere, said that they thought there might be a slowdown in production. It was a jump in futures from about $26 to around $42. Just on the rumor. Production didn’t slow, hasn’t slowed, and doesn’t look like it’s going to. It’s only a matter of time before reality takes hold, once again, and the falling demand will incite the falling price action.
So, the major characteristic of the oil picture is the diverging demand and supply, decreasing and increasing respectively, with no real end in sight. There are more jobs being created in the US at the moment, and that would suggest that businesses are experiencing an increase in demand for their goods and services, but with a contraction in the global economy how long can that really last? What sort of long-term growth is it that the Fed is seeing? Where do they expect it to come from? How will it be sufficient to reverse the downward trend in world markets such that interest rates would even be relevant?
No matter how you add it up, you can’t make a dollar out of 85 cents, and when the global economy slows that means businesses have less to do. When that happens they cut whatever isn’t necessary, and workers are near the top of that list, so using employment data as a metric to confirm the economy is growing when virtually everything else says it’s not sounds a little strange. When workers can’t work, then they have no way of paying their debts and that means we’re going to see mortgage defaults and banks eating shit.
But those interest rates, though, those are some nice lookin interest rates, right?
Full disclosure, I’m not a financial professional. I’m completely self-taught. I’ve formed my opinion on this from a lot of unstructured self-education and lots of really stupid mistakes trying to become rich in the stock and commodities markets, but I just don’t see how anyone in their right mind could look at what’s happening and be so optimistic. I’m not alone in this opinion that such optimism is perhaps misplaced, however. There are some who feel that there are serious headwinds coming and perhaps a correction that could bring markets crashing down dramatically. They use methods and metrics that I can’t honestly say I understand, but if there’s a lot of math, a chart, a loose system of logic that sounds about right, and it’s a system that seems to have been in use for some time, I’m just going to skip the work and assume it’s right. Smarter people than me seem to agree with my assessment. It seems like we’re fucked, and it seems like Janet Yellen is…well, look at that silly picture I drew up top.