19 Aug The Markets, the Economy, and Perhaps Global Order is on the Brink of Change.
Today the Minutes from the July FOMC meeting are released. As noted yesterday, the economic landscape is different today than that of three weeks ago. Housing and autos are showing considerable strength. China has devalued. Oil has plunged, falling by a record amount in July. Global financial markets are volatile and are on edge.
Many times I have commented about the velocity of change and to expect the unexpected.
What are the odds OPEC’s decision to capture market share by price will be viewed as one of the greatest economic blunders in at least 100 years given the anarchy already present in the Middle East? Yesterday three of OPEC’s smallest members (Venezuela, Algeria and Libya) requested a production cut from both members and non-members for budgetary/social reasons.
Saudi Arabia, the world’s largest oil producer is hemorrhaging money as foreign reserves have plunged from $724.5 billion in January to $664.4 billion in June. Some are expecting if crude remains at current levels, reserves would fall to around $560 billion by year’s end.
Saudi Arabia opened its financial markets two months ago, an event that has not produced the windfalls expected as the bourse is continuing to decline falling another 3.9% yesterday. As noted several days ago, the kingdom turned to the bond market for the first time since 2007 to help meet its 2015 budget.
Because of the sharp decline in crude, the IMF is now projecting Saudi Arabia’s 2015 deficit to be around 20% of GDP. The IMF further commented “the sharp drop in oil revenues and continued expenditure growth would result in a very large fiscal deficit this year and over the medium term, eroding the fiscal buffers built up over the past decade risking considerable financial distress.”
In my view Saudi Arabia is at proverbial cross roads. If the kingdom cuts social spending, the odds of anarchy rise. If spending is not cut and oil remains at current levels, economic pressures increase.
As noted above, the Middle East is already in chaos, the greatest chaos since the dissolution of the Ottoman Empire 100 years ago which created today’s map. What are the odds the geopolitical and socioeconomic events in Saudi Arabia becomes a major topic of monetary discussion just as China is perhaps today? Few thought China would devalue.
Continuing with this theme, I think the markets, the economy, and perhaps global order is on the brink of change. Will this be positive or negative change? What are the odds US, European and Japanese growth exceed expectations, partially the result of strong housing and auto sales in the US? What are the odds the respective presidential nominees are vastly different from today’s consensus?
As stated, I think the status quo is on the verge of major change, but to what? The discussion on this view is infinite.
What will happen today? Yesterday’s trading was quiet, a good representation of the trading during the “dog days of summer.”
Last night the foreign markets were down. London was down 0.91%, Paris down 0.64% and Frankfurt down 1.10%. Japan was down 1.61%and Hang Sang down 1.31%.
The Dow should open nominally lower ahead of the Fed Minutes fearing a slowdown in global growth. Bloomberg writes emerging markets are now at a four year low on these concerns. The CPI is released at 8:30 and little reaction is expected from this data point. The 10-year is unchanged at 2.19%.