Home' Trinidad and Tobago Guardian : August 27th 2015 Contents The financial headlines at the
end of last week were stunning.
US oil futures suffered the
longest streak of weekly losses
since 1986 (29 years). The last
time this happened was when
the market fell for ten straight weeks ending
March 1986 and T&T was in the grip of the
International Monetary Fund.
Last Friday, the price for West Texas Inter-
mediate Oil closed at levels not seen since the
Great Recession in 2009. That was when the
US Federal Reserve was in the mode of quan-
titative easing. Today, at the same price point,
the discussion is about when they will raise
The events of the Great Recession provide
a good reminder of how quickly things can
change. In July 2008 the price of a barrel of
West Texas Intermediate oil was US$146, by
December 2008 the price had fallen to US$32.
The fundamental lesson: never be complacent
in dealing with the markets.
As I pointed out a few weeks ago under the
headline, "The oil bust and T&T", it is not only
oil but the entire commodities complex that is
In an article on Bloomberg Business, there
is a suggestion that the fall in oil and hard com-
modities has seen US$2 trillion of market cap-
italisation wiped out from oil and mining com-
panies. That s equivalent to the size of the
Indian economy measured in terms of gross
The impact of falling commodity prices was
felt in the stock market. During the course of
last week, every major stock market index---
except in Japan---fell below its 50-day moving
average, a move that represents a bearish signal.
The US stock index, the Dow Jones, had its 9th
largest point drop in its history. Overall last
week represented the worst week for US stocks
since 2011, the worst week for global stocks
since May 2012 and China s worst week in five
In another bit of trivia, Bloomberg is also
reporting that the world s 400 richest people
saw their value decline by a combined US$182
billion as a result of the stock market. Then
again, what s US$182 billion out of a combined
net worth of $3.98 trillion.
Clearly, though, all is not well.
The main point underlying the headlines is
that global growth is turning out to be lower
than anticipated, especially in China. This is
prompting a global sell off in stocks. None of
this is really news, though. On August 5, I point-
"The bigger issue can once again be tied back
to global dynamics. If one were to step back
you will realise that it is not just oil but the
entire commodities complex is in a downward
trend. Base metals such as copper, nickel, tin
are all down around or about 20 per cent year
to date. The decline in base metals coupled
with the soft oil market speaks to an overall
decline in industrial production on a global
"This is consistent with a theme I have been
advocating for many years. That is, the prospects
for global growth in the post crisis scenario
have been overestimated and each year we have
seen downward revisions to global growth fore-
casts. This is the fundamental reason why glob-
ally interest rates have stayed low for as long
as they have."
In May 2014, at an investor briefing to clients,
I pointed to three broad issues that will affect
the global economy going forward.
Those three issues remain in play and are as
1. Cyclical issues: The basic point being
the need to increase demand and supply in the
right areas around the world. Many emerging
markets need to focus on increasing domestic
consumption as opposed to producing for export
to developed markets where demand is tepid.
2. Secular issues: Here we are dealing with
the lack of infrastructure spending in the US,
demographic issues in the developed world and
transitions in the Chinese economy as they
attempt to move to a more consumption based
3. Structural issues: Reference here is to
the debt overhang and a general over leverage
across the global financial landscape which is
causing growth to move at a slower pace than
it did in the previous decade.
These three fundamental themes remain and
if we, in T&T, don t implement the appropriate
policies in the context of the global landscape
we will be creating a fairly insurmountable
challenge in the post 2020 era.
My comment to clients last year was that
"these three challenges have produced what
has been termed a secular stagnation which
effectively manifests itself through a low growth,
low inflation environment.
As we muddle through these three challenges,
there will be some level of success on all of
these fronts and those who focus on only one
of these issues have been able to claim and will
continue to claim victory.
The problem is that we really have to over-
come all three challenges. Since there is an
uneven response, recovery is uneven, the data
is mixed and uncertainty prevails."
The uneven recovery, the mixed data and
the uncertainty were reflected last week in the
stock market dynamics. If you understand why
things are taking place then you are less prone
to panic and it takes the emotion out of investing
which is necessary for success.
On the issue of US Treasury yields and where
I expected interest rates to be, I suggested to
clients, at the time, that the performance of
the US long-term bond was suggesting that
we would be experiencing problems with both
low growth and/or deflation.
The following points were made which have
merit some 15 months later.
• Bond yields are following core inflationary
pressures and these inflationary pressures are
not picking up. The US Fed will only seek to
adjust the Fed Funds rate after inflation picks
• The US Fed will end QE in Q4 2014. (This
has happened as suggested).
• Expect the Fed to begin to raise short-term
rates in late 2015. This is still the most likely
outcome but, in May last year, the consensus
view was that the first rate hike would take
place in March of this year.
• The pace of rate hikes will be slower than
consensus; the markets are now coming around
to this view.
In two to three years from now I expect a
Fed Funds rate of no more than two per cent.
Consensus was for four per cent; once again
the market is now coming around to this view
that there will be a slower pace of rate hikes.
So, how does this all end and what does an
investor do in the face of the many negative
Prior to the latest decline in oil prices, I
expected the US Federal Reserve to introduce
their first rate hike in September. I am now
revising my view to December. The falling oil
price and strong US dollar will keep inflation
Further, China s devaluation of its currency
effectively means that they are exporting defla-
tion to the rest of the world.
The US Treasury yield curve is flattening out
as the market anticipates rate hikes at the short
end and also piles into the long end as global
uncertainty mounts. The Fed will be cautious
about the pace at which they raise rates so as
to guard against an inversion of the yield curve.
An inverted curve is where short-term rates
are higher than long-term rates and is a predictor
of a recession.
The slope of the yield curve is therefore a
gauge of economic activity and the flatter curve
suggests a reduction in economic growth
prospects in the US. Appreciate that the TT
yield curve is also flattening out.
On average it takes around 15 months for the
US yield curve to move from upward sloping
to flat to inverted. This is a trend that you
should pay close attention to going forward.
The direction of earnings is correlated to the
growth prospects for the economy. Since we
are seeing signs of slowing economic growth---
both in the US and globally---then it stands to
reason that the pace of corporate earnings will
This trend is already in effect. As earnings
growth slows the markets will take note as the
stock market itself will correlate to the direction
of earning growth.
Overall, the current market turmoil is nec-
essary for the market to remain in an upward
trajectory. I believe we are in the late stages of
the market rally but there is room for upside
left in this cycle.
Ian Narine is a broker registered with
the SEC and can be contacted at
BUSINESS GUARDIAN www.guardian.co.tt AUGUST 27 • 2015
The current market
turmoil is necessary
for the market to
remain in an upward
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