Last week was one of significance given the action by the ECB. Tomorrow is the commencement of the two day FOMC meeting where many are expecting the US central bank to offer more guidance regarding the time table of a change in US monetary policy. As most have noted, Europe is adding stimulus and the US may soon remove stimulus, a complete contradiction in policy.
I think it is accurate to write there are two overwhelming myopic narratives, narratives where the inverse is not even being remotely considered. In many ways, I think today is similar to the singular narrative of the late 1999 early 2000 when consensus thought we had entered into a “New Paradigm” and the business cycle was dead.
The first narrative is oil. I rhetorically ask has anyone even considered a bullish case, a bullish case that I think may have some merits?
According to the US Energy Information Agency (EIA), during 2014 the US imported 9.9 million barrels a day of which 56% was imported from OPEC. The EIA states US daily demand is 19 million barrels daily.
I think most will agree the Middle East is on the verge of anarchy, where the unexpected is constantly occurring and perhaps raising the odds of a supply disruption. Some might write this is a sensationalist view, but is it?
Saudi Arabia, whose longtime leader just died, reports its youth unemployment rate (defined as under 29) is 51%. It is also widely reported Saudi Arabia requires oil at $90/barrel to balance its budget, a budget steeped in transfer payments to placate its young and restless unemployed population, the demographic group most vulnerable to Islamic radicalism.
How long can the Saudi’s maintain current oil policy?
The second dominating narrative is QE is equity bullish and to date has not impacted inflationary pressures or future expectations. The current QE environment will last forever with yields continually declining.
As noted several times, this is the strongest start ever for long dated treasuries.
Inflation is defined as too much money chasing too few goods fearing higher prices tomorrow.
I ask what are the odds that violence induces a Middle East oil supply disruption that causes a spike in oil prices and inflationary expectations, the environment partially the result of America abdicating its 70 year unspoken role of global policeman?
Some might be commenting that I am having an irrational sugar imbalance that has over amped my anxiety levels. Perhaps, but during my thirty years in the investment industry I have experienced much more radical and unexpected events. For example in three months I/we experienced (ok survived) a complete rewriting of American capitalism.
Is such a scenario really that farfetched given the rise of Islamic jihadism?
Enough of the geostrategic diatribe, tomorrow the FOMC starts a two day meeting. No change in policy is expected but all will scrutinize it post meeting statement.
Other events this week include manufacturing and housing data, confidence data and fourth quarter GDP.
This week can be volatile.
Last night the foreign markets were mixed. London was down 0.45%, Paris up 0.10% and Frankfurt 0.80%. Japan was down 0.25% and Hang Sang up 0.24%.
The Dow should open quietly lower. As expected the anti-austerity party won a convincing victory in Greece yesterday. Did the ECB anticipate such a victory, a reason for their QE on steroids and why markets are relatively quiet this morning? Is this the just the calm before the storm? Talk about massive global uncertainty in some many dimensions. Ukraine. Greece. Euro. Saudi Arabia. Iran. Iraq. Libya. Syria. Yemen. Venezuela. I think I will stop as I am getting to anxiety ridden.
The 10-year is unchanged at a 1.80% yield.
