YOU DECIDE

Forget China for a minute and it's recession.There's growing concern about the U.S. falling back into recession. Recall the Fed with one rate hike of a mere 25 basis points under its belt, it's essentially out of economic bullets. And returning rates to ZIRP land again, the globe needs like you need a wart on your nose.

The world’s financial system has become dangerously unstable and faces an avalanche of bankruptcies that will test social and political stability, according to a leading global banker.

William White, chairman of the OECD’s review committee and former chief economist of the Bank for International Settlements, who suggests the stresses in the financial system are now “worse than it was in 2007”.

Speaking to the UK Telegraph’s Ambrose Evans-Pritchard before the start of the World Economic Forum in Davos, White warned that macroeconomic ammunition to fight further economic downturns is essentially “all used up”.

“Debts have continued to build up over the last eight years and they have reached such levels in every part of the world that they have become a potent cause for mischief,” he told the Telegraph.

“It will become obvious in the next recession that many of these debts will never be serviced or repaid, and this will be uncomfortable for a lot of people who think they own assets that are worth something.”

Davos is that big party in Switzerland, for big people, that gets big press coverage annually that turns out to be a big nothing burger. And maybe someone from the ECB  or the Fed, both of which claim they can't find any inflation, 2% or otherwise, should read this story.

JOHANNESBURG – The weaker rand has resulted in prices sky-rocketing in Davos for South Africans who have travelled there for the World Economic Forum.

A meal has cost one business reporter a whopping R700.

It could cost an individual anything up to R500,000 to attend this year's World Economic Forum in Davos.

Editor and Publisher of biz news, Alec Hogg, says this is his thirteenth trip.

Yesterday he purchased a chicken Caesar salad and a glass of milk - the same meal he bought last year.

“It cost me 41 Swiss francs and 50 cents and that’s worth up to R700 as compared to last year where it was just over R500 and the year before it was under R400.”

Hogg says this shows how the rand is falling.

There are about 80 South African delegates attending this year and the overall cost is about 40 percent more compared to last year.

The  rand is not the only currency falling against the dollar. Look at charts of the Canadian loonie, The Brazilian real, the Russian ruble, the New Zealand and Aussie currencies, to mention a few.

Last week industrial production numbers came out and the news was not what economists expected. According to data from the Federal Reserve, industrial production dropped in December 0.4%

Well, the news is out and  it's not what economists expected. According to data from the Federal Reserves, industrial production dropped in December 0.4% and the previous period was toned down to 0.9%, a drop of 0.6%.  So the 4Q number was on an annual basis down 3.4% for industrial production.

Capacity utilization, an indicator to gauge how ramped up or down industry is as a whole, also disappointed. Economists were expecting a higher number than the 76.5 they got for the month. The indicator is supposedly about mining, manufacturing, electric and gas utilities since it takes energy to run industry.
  
Last week, following a long period of poor internals and weakening order surplus, we observed fresh declines in industrial production and retail sales. Industrial production has now also declined on a year-over-year basis. The weakness we presently observe is strongly associated with recession. The chart below (h/t Jeff Wilson) plots the cumulative number of month-over-month declines in Industrial Production during the preceding 12-month period, in data since 1919. Recessions are shaded. The current total of 10 (of a possible 12) month-over-month declines in Industrial Production has never been observed except in the context of a U.S. recession. Historically, as Dick Van Patten would say, eight is enough

 
 A broad range of other leading measures, joined by deterioration in market action, point to the same conclusion that recession is now the dominant likelihood. Among confirming indicators that generally emerge fairly early once a recession has taken hold, we would be particularly attentive to the following: a sudden drop in consumer confidence about 20 points below its 12-month average (which would currently equate to a drop to the 75 level on the Conference Board measure), a decline in aggregate hours worked below its level 3-months prior, a year-over-year increase of about 20% in new claims for unemployment (which would currently equate to a level of about 340,000 weekly new claims), and slowing growth in real personal income.  advisorperspectives.com/commentaries/20160119-hussman-funds-an-imminent-likelihood-of-recession.

Fear can be oversold and it can be overbought.You have to decide.

MARKETS SPEAK

 
Current concerns over China run way deeper than just the numbers, but that's the focus you see and hear in MSM.

The much deeper, more important lesson people are leaning is you can't trust government numbers. Any government. As a kid growing up in school you hear about those Banana Republics with their economic problems and corruption and you think it can't and won't happen here.Then one day suddenly you're a grown person and you realize it's been going on all along.

If you can't trust government numbers, you can't trust governments. Any government. There's a poll in the WSJ today showing that if Trump and Sanders are the two candidates for president in the up- coming election and if the it were held today, Sanders would win by a fairly wide margin.

That's one of those go figure things. At a time when more and more people around the world are angry and disgruntled with government, Americans would elect an admitted socialist, a guy who would do his best to impose more government on them.

Now we don't know how honest or accurate that poll is because polls are are comprised of numbers with people who have an agenda and there's something called mass-directed propaganda that gets unleashed by private and public sectors.Take a look at the pharmaceutical industry or the CDC.

What we do know is this, though it 's most unwelcome in our PC-controlled society today: People get what they deserve. And dear investors, whether you recognize it, that's what these markets are telling you. One of the major goals of the PC crowd is to abolish the responsibility of caveat emptor.

As an article we recently read about China's economic woes, with more expected, concluded: You have been warned.

HOPE FOR A RALLY CONTINUES

What the market gives the market takes.

That's pretty much the story overnight as Asian shares returned most of Tuesday's gains. The culprit of choice was once again that thick black stuff the climate change crowd loves to hate but a bunch of people of nearly all ages hope will stage some sort of rally soon.

Without energy there's no demand for a real recovery and without a real recovery there's no demand at this point for energy. So it become like a lot of things in the world today a stalemate. Earlier the Shanghai Composite index was down  neatly 1.4% while the Hang Seng in Hong Khong, the ASX 200 and the Nikkei 225 suffered similar fates.

For Japan the market entered bear market land, now down over 20% since it topped out last June. For the Hang Seng it was the lowest level since 2012. It's like one of those déjà vu all over again things. Market after market down double digits from their recent highs. In the case of Australia's ASX 200 it's down nearly 20% from its high last spring.

Crude fell to a new13-year low. Gold eked out a small positive gain as investors continue to wait for more positive news than that of the past few weeks. Hope springs eternal.

WHAT'S YOUR NECTAR?

 One man's nectar is another man's poison.

That appears to be the case with commodities as noted in a report from Macquarie Bank, the big Australian financial services firm. In a word, it's hard to get a little help from one's friends when one doesn't have any friends.
  
Commodities have no friends at the moment.

From energy to softs to base and precious metals, prices have been hammered almost unilaterally across the board, weighed down by a combination of a strengthening US dollar, increased supply, tepid demand and, as a consequence, mounting disinflationary pressures.
The paragraph below, from Macquarie Bank's commodity analyst team, is reflective of the broader investor mood when it comes to commodity markets - they hate them.

The world simply hates commodities at the moment. Prices keep on falling, producers are in a battle for survival and, more worryingly, demand isn’t reacting that positively as of yet. They are providing a catalyst for currency volatility, causing headaches for many emerging market governments and leading to wider concerns around systemic financial risk. This is particularly true as deflationary pressure intensifies which in turn drives business caution and amplifies the fundamental problems pervading commodity markets. We remain in the wrong type of global economy for commodity prices to perform well.

According to Macquarie, there is only one thing that can break the current cycle of ever-lower commodity prices. Unfortunately for those hoping that 2016 will herald a year of accelerating global growth, they believe supply, not demand, holds the key for a move higher in prices.
According to the bank, the crude oil market, in the midst of a severe supply glut at present, holds the key to not only stabilising prices for the energy sector, but the broader commodity complex as a whole.
 
In recent times oil has been leading everything lower. Moreover, the lagged deflationary pressure will push industry cost structures (and pain points) for other commodities even lower. However, we expect global crude oil markets to return to seasonally normal supply-demand balances by 3Q16, while 2017 will be the first year in five that results in an annualised inventory draw. We expect the resulting oil price recovery will at least go some way to breaking or even reversing the current global deflationary down cycle.

Macquarie suggest that the slumping crude oil price has kept more marginal producers of other commodities in production, lowering their running costs and, as a consequence, keeping markets awash with supply that would normally be displaced in the past.
However, given their expectation that the crude market will return to normal supply-demand by the September quarter this year, this will help to support crude prices, placing additional cost pressure on marginal commodity producers.

 Based on this assessment, the bank has compiled a list of commodities that they expect will outperform over the next two years, along with those likely to benefit from short-term seasonality factors along with those to avoid. More:

We don't know what your definition is of blood in the streets and we're not saying this is necessarily one. But if it isn't it's got to be pretty darn close.

businessinsider.com/macquarie-everyone-hates-commodities-2016-1? 

OVERNIGHT

The news is out and it's right in line with expectations. We're talking China's GDP numbers, at 6.8% annualized for December.

That should be your first clue, when something as complicated and arcane as the world's second largest economy hits the economic nail on the head. But we will let that slide for now. Reuters reported it this way:
  
Growth in fourth-quarter gross domestic product (GDP) eased as expected to 6.8 percent from a year earlier, down from 6.9 percent in the third quarter and the weakest pace of expansion since the first quarter of 2009. Full-year growth of 6.9 percent, enviable by Western standards, was China's poorest showing in quarter of a century.

Other data on Tuesday suggested the world's second-largest economy lost more steam in December, dashing hopes that a year-long flurry of government stimulus would finally kick in.
 It's this other data you want to pay attention to because there's nothing dashing in these numbers. Rather it's an attempt to release the air slowly to cover up just how bad it is and prevent a stampede of panic in the markets. The answer to the how bad is it is simple: Even the Chinese don't know.

Economists as you'd expect are out in force commenting on the data. Here are some reactions from a  WSJ article.

China’s economic growth is unlikely to rebound anytime soon. While the headline numbers match expectations, the detailed figures, such as industrial production, are a bit weaker than expected. Overall, today’s data confirmed the fact that Chinese economic growth is on a downward trend. China’s gross domestic product will likely slow to about 6.6% this year and 6.3% in 2017. The industrial sector is really struggling now. I think the government should further cut taxes to help boost the manufacturing sector. – Zhang Fan, RHB Research

We forecast that China’s growth will slow to 6.4% in 2016, and hit the trough of 6.0% in 2017. A gradual rebound in growth could start in 2018, together with an upward property market cycle and political business cycle. It is still possible that China could achieve an average 6.5% growth during its 13th five year plan (2016-20)  provided that the government takes decisive measures to tackle the highly indebted corporate and local government sectors in the coming two years. –Li-Gang Liu and Louis Lam, ANZ Research

 The upshot is that while the official GDP figures shouldn’t be taken at face value, growth does appear to have been broadly stable last quarter and the December data, although mixed, don’t suggest that China is now entering a deeper economic crisis. On the contrary, with the tailwinds from recent policy stimulus still gathering we actually expect the data to gradually turn more upbeat over the next few months. – Julian Evans-Pritchard, Capital Economics

Meanwhile, back at the ranch the Nikkei traded up for the first time in four sessions; Australian shares edged higher 0.9%; the Kospi stretched slightly higher 0.6% and The Shanghai Composite Index was up nearly 3%. Gold fell 0.2%, closing at $1,088.80 and Brent crude hit a new 12-year low, most likely owing to Iran's sanctions being mothballed, at $27.70 a barrel.







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SWIMMING UPSTREAM

No doubt today the media--at least the financial media--is awash in stories about the oil sanctions against Iran being lifted over this past weekend.

The fear is a further fall in oil prices from what has already been a bigger slaughter than many so-called experts thought. Iranian oil is expected to reach as much as 500,000 barrels a day, something this already over-supplied market clearly doesn't need if prices are not to fall further.

But it just might be time for one for one of those, "Not so fast!" insertions. A story three days ago in the UK Daily Telegraph suggested a ray of hope. Saudi Arabia is already suffering mightily from these cheap prices and they're not alone as the strong dollar has led to further pain beyond just cheap prices.

The first signs of a thaw are emerging for the battered oil market after Russia signalled a sharp fall in exports this year, a move that may offset the long-feared surge of supply from Iran.

The oil-pipeline monopoly Transneft said Russian companies are likely to cut crude shipments by 6.4pc over the course of 2016, based on applications submitted so far by Lukoil, Rosneft, Gazprom and other producers. 

This amounts to a drop of 460,000 barrels a day (b/d), enough to eliminate a third of the excess supply flooding the world and potentially mark the bottom of the market. Russia is the world’s biggest producer of oil, and has been exporting 7.3m b/d over recent months.

The big question as the article points out would such a move be market-driven or purely politics.
When you're dealing with the Russians it's anyone's guess. Just last month OPEC put out a statement that it alone was too small to act alone, a plea many believe aimed at Russia,the world's largest producer of oil, that brokering a deal might be possible.

Remember, the Saudis are unable to protect themselves. That's why the U.S. for years has been their essential big brother, but recent events have strained those relations. When you're looking around for survival at some point you'll take what's available. Either Russia or China, take your pick, are big enough to protect them.

There's is another factor here in our view that many don't want to own in this election year. U.S. foreign policy has been pathetic for years and this administration has matched it colleagues at the Fed with its own ZIRP policy. Yet one of the leading candidates for the White House has been an intimate part of that policy. It might date us, but there's an old saying: "Go Figure!"

Meanwhile, we think there will be some big surprises this year that in the end will bode well for those brave enough to test their upstream swimming skills.

telegraph.co.uk/finance/economics/12100609/Glimmers-of-hope-for-oil-as-Russia-poised-to-slash-output