“Every revolution evaporates and leaves behind only the slime of a new bureaucracy.”
-Franz Kafka
Many people in the pundit class are calling this the most important election of our lifetime. To be fair, that line seems to be trotted out every four years. Who knows? Maybe this time they’re right? Certainly, the extreme options that Americans are being faced with as an electorate suggest something is askew...
On the left, the extreme option that is very realistic is socialism, while on the right (and I’m sure this will offend some) there are options that appear akin to fascism, of sorts. Perhaps the next American Revolution is on its way? Regardless, the next 8 months will be entertaining as it becomes increasingly likely that Hillary Clinton and The Donald may be going toe to toe. As voters, we can be fairly certain we will get “the slime of a new bureaucracy.”
Speaking of revolutions, the Iranian Revolution occurred some 37 years ago this month. Over that period, America’s relations with Iran have been rocky to say the least. More recently, with the signing of the Joint Comprehensive Plan of Action between Iran and P5 + 1 (the five permanent members of the UN Security Council and Germany), relations have seemingly thawed and most importantly the oil spigot is coming back on.
Our view is that perhaps the single most important question determining the price of oil from a supply and demand perspective is how quickly Iranian production ramps back up. So far, Iran has surprised the experts with its ability to get production back online. The pace at which Iran goes from its current roughly 1.1 million barrels per day of production to its target of 4.5 million, will weigh heavily on the global oil market and the over-levered balance sheets of domestic producers for years to come.
Digging further into this topic, this coming Thursday, we will be hosting a small group dinner in New York with former U.S. Secretary of Energy Spencer Abraham, former Vice Chairman of the International Energy Association Joe McMonigle, and Guly Sabahi who is a partner in the internal energy practice at Dentons and a noted expert of the soon-to-be unveiled Iran Petroleum Contract. If you’d like to stay ahead of the proverbial curve and join the dinner, please email to reserve a spot.
Back to the Global Macro Grind …
In the world of global macro data points, one to note this morning is that a survey of Chinese economists indicated that the Purchasing Managers Index is expected to decline in March. As emphasized by the Chart of the Day, this would be the seventh straight monthly decline in Chinese PMI and just another in the litany slowing economic data points globally. But don’t worry, PBOC Governor Xiaochuan was speaking at the G-20 yesterday conference and indicated the Chinese central bank still has room to ease . . .
Japan has more significant headwinds than a monthly purchasing manager survey decline. According to the 2015 census, Japan’s population declined for the first time on record. Japan’s population shrank by about 0.7%, or almost a million people over the last five years. Most noteworthy is that population decline is really a broad based issue in Japan with 39 out of 47 prefectures and territories showing a decline.
Given this backdrop, it should be no surprise when we report this morning that Japanese CPI came in at a blistering +0.0% this morning. When your population is in full on decline, it’s pretty hard to engineer inflation, no matter how many trillion Yen your central bankers throw at the problem.
In China, central bankers are telling us that they have room to do more. In Japan, they are telling us they aren’t worried about negative rates. And at the G-20, IMF Managing Director Lagarde was urging nations to implement more fiscal reforms and structural reforms. Clearly, whatever economic malaise we are currently experiencing and may experience through the course of the year, there is an appropriate government response. That said, with German CPI falling -0.2%, that response is not likely to be a fiscal one.
In the U.S., the major uncertainty still revolves around the Presidential election. According to our colleague JT Taylor at Potomac Research, Senator Rubio may have gained some much needed ground in last night’s debate. As JT wrote this morning in his morning bullets:
“MARCO HITS HIS MARK: "Robo-Rubio" is officially gone. Marco Rubio needed a strong performance last night to show that he was capable of taking on Trump, and he delivered --whacking him with a phone book's worth of oppo research at the outset, and making much of the debate look like a one-on-one between himself and Trump. He also took a major step to solidify his standing in the establishment lane. He figured out that mocking Trump is far more effective than attacking him as a liberal. Cruz jumped into the fray, leveling additional attacks against Trump and his business dealings, but hewed closely to his stump speech and was argumentative and petulant for the second debate in a row. He did get some punches in, but because he split his time taking digs at Rubio and Trump, he was outshone by Rubio's sarcasm and agility.
The big test for Rubio will come in the media cycle between now and Super Tuesday, and whether he can survive the certain counterpunch from Trump. The big test for the Republican party will be whether last night changes Trump supporters' feelings about the mogul -- if past is prologue, the answer is no. The big question for Rubio and Cruz -- where have you been for the past 10 debates?”
This may not be the most important election of our lifetime, but it will certainly have a direct impact on the economy and policy, so we will be reporting on it in real-time. If you’d like to be added to JT’s morning bullets, please email and let them know.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.65-1.82%
SPX 1
VIX 17.99-27.48
EUR/USD 1.09-1.13
YEN 111.30-114.95
Gold 1178-1252
Oil (WTI) 27.07-34.25
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
