Global Economic Growth Has Not "Bottomed"

Takeaway: Many contended China's economy "bottomed" around April. We disagreed. Still do.

Global Economic Growth Has Not "Bottomed" - z china


Ugly import and export data in China triggered a global equity market selloff yesterday as investors feared a slowdown in global growth.


Now let's back up a bit. This past April China announced growth of 6.8% for the first quarter, down slightly from 2015's 6.9% reading. A slew of headlines and analysts came out of the woodwork arguing "targeted stimulus" would be the panacea helping to stabilize growth. The China "bottom is in," they proclaimed.



Contrary to mainstream media views, Hedgeye Senior Macro analyst Darius Dale wrote (on 5/2/2016),


"Our analysis renders us firmly on the other side of such hope that China accelerates from here and effectively resuscitates global demand growth enough to stave off continued macroeconomic and microeconomic deterioration in the U.S."


Here's China's (abysmal) trade data reported yesterday for September: 


  • Exports -10% 
  • Imports -1.9%


On the news, Dr. Copper (a commodity-market proxy for global demand) resumed its long-term bear market, trading back down to $2.11/lb (see chart below). Meanwhile, China's Shanghai Composite is down -13% year-to-date.


We reiterate our call that Global GDP (and cyclical demand) is entering its slowest part of the cycle (Q4 and Q1). In other words...


the bottom is not In. Not Yet.


Global Economic Growth Has Not "Bottomed" - copper 10 14 166


CHART OF THE DAY: Wealth vs. Leverage: The Subprime Resurgence

CHART OF THE DAY: Wealth vs. Leverage: The Subprime Resurgence - credit cards info

Rising leverage is a massively underappreciated risk. In 2015, it was the fastest year ever in the number of credit cards issued to deep sub-prime and traditional sub-prime borrowers.

Cartoon of the Day: Crude "Cuts"

Cartoon of the Day: Crude "Cuts" - Oil cartoon 10.13.2016


OPEC sits on ~80% of global crude reserves but has "virtually no control" over how much crude its members produce.

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4 Reasons Why We (Still) Don’t Like Hanesbrands | $HBI

4 Reasons Why We (Still) Don’t Like Hanesbrands | $HBI - hbi sell

HBI is down -2% today on an analyst downgrade. We told Investing Ideas subscribers to sell the stock on 3/31. It’s down well over -10% since then. Here's why we still don't like the company.

A Brief History of OPEC Price Manipulation

A Brief History of OPEC Price Manipulation  - opec 9 29


Gone are the days when OPEC controlled 50% of global oil production. The spotlight has shifted to U.S. shale among others.


That doesn’t sit well with OPEC. In an effort to break the backs of U.S. producers and maintain market share, OPEC as a whole has been pumping record levels of oil in an effort to squeeze these producers out of the market. (Fracking is a more perpetually capital-intensive extraction process and has a much higher marginal cost per barrel to pump in many regions than traditional Saudi plays)


A Brief History of OPEC Price Manipulation  - opec box


Then came the “freeze talks.” OPEC has been talking about cutting or, at least, freezing production at current levels for some time now in an effort to boost prices. The latest oil babble is that OPEC has a “deal to agree to a deal” to freeze production at its next meeting. Make no mistake, oil-rich states like Russia and Saudi Arabia are hurting because of low oil prices, Hedgeye Commodity analyst Ben Ryan said on The Macro Show this morning. These countries have an obvious incentive to boost prices when the time is right (after more production elsewhere comes offline).


“Saudi Arabia’s economy is hurting. You’re talking about a country that receives an estimated 75% of its revenue from oil production. The oil industry contributes between 40-50% of GDP which is more than the entire private sector. The fact that oil prices have gotten absolutely crushed is meaningful. Their budget deficit relative to GDP hasn’t had this drag since the mid-80s. So to suggest that they’re fine with $40 oil is certainly not the case, but they want production to come offline more than anyone then they are more in a position to step in and talk about production cuts.”


Clearly, in the long term, higher oil prices are preferred. But until OPEC members can assert their dominance over modern, non-traditional plays on the global stage we’re skeptical this deal gets done. We’ll see.


The latest news is that Russian President Vladimir Putin – his country is not a member of OPEC – has said that should a deal be signed, Russia will freeze production too. Again, we’re skeptical of this. Russia's largest oil company, Rosneft, said yesterday it would actually increase oil production above 2015 levels. As policy analyst Joe McMonigle wrote in a research note out of the Algiers meeting at the end of September, Russia has a poor track record of cooperating with OPEC on production limits.

All of this raises an entirely different question...


Can OPEC actually control the production of its members and therefore control the direction of prices?


While OPEC sits on ~80% of global crude reserves, OPEC as a “cartel” to be reckoned with, has had virtually no impact on how much crude its members produce. OPEC sets quotas, but its member countries cheated about 96% of the time from 1982 to 2009, according to a study by Brown University professor Jeff Colgan.


A few of the more salient findings:


  • OPEC announcements have an ability to move spot prices for 15 to 20 days. but there is exactly zero evidence OPEC is actually restricting output during this time
  • On average, over this 1982 to 2009 period, the nine principal members produced on average 10% more oil than their quotas supposedly allowed
  • The relationship between oil prices and OPEC quotas is virtually uncorrelated (r^2= 0.15)
  • All but two members over-produced in more than 80% of the months during this period. The exceptions were Iran and Venezuela, which still cheated over 70% of the time
  • There were 22 OPEC meetings in that same period in which quotas were increased, and in 21 cases, the new aggregate quota for the 9 principal member was lower than what those countries were producing a month prior to the change


Whatever OPEC members decide at their November meeting, history suggests everyone will continue to drill, baby, drill. If they still have the funds, of course.


A Brief History of OPEC Price Manipulation  - OPEC market

Guest Contributor: What Does History Tell Us About Trump’s Trade Policy?

Editor's Note: This piece is reposted from the Council on Foreign Relations’ Geo-Graphics blog. It does not necessarily reflect the opinion of Hedgeye


by Benn Steil and Emma Smith


Guest Contributor: What Does History Tell Us About Trump’s Trade Policy? - z benn


The central theme of Donald Trump’s economic policy is trade.  He promises to slash America’s trade deficit by tearing up international agreements and imposing massive new tariffs on imports from China (45%) and Mexico (35%).  By cutting the trade deficit from $500 billion to zero, according to his senior economic advisers, $1.74 trillion in new tax revenue will accrue to the Treasury over the next decade.  Trump will use this massive windfall to fund two-thirds of his proposed tax cuts.  If true, this will indeed go some way toward Making America Great Again.


But unfortunately it isn’t—not by a long shot.  If produced by a Macro 101 student, this sort of analysis would send his professor into paroxysms of red-pen rage.


Guest Contributor: What Does History Tell Us About Trump’s Trade Policy? - z pro


Trade deficits, you see, do not just disappear, and tax revenues soar, because you block imports.  A trade deficit results from a deficit of savings relative to investment.  If savings and investment don’t budge after imports fall—which they don’t in the Trump analysis—then exports must fall by an equivalent amount.  The mechanism by which this would happen is simple.  The lower demand for non-U.S. currency created by the import cut pushes up the value of  the dollar, which makes U.S. exports more expensive and imports cheaper.  So imports rise and exports fall.  The trade deficit remains the same.


For the trade deficit to fall, savings and/or investment have to change. The last two times we saw a significant fall in the trade deficit—in 1988-1992 and 2006-09—investment fell significantly more than savings.  What was the result?  The two largest recessions in the last 35 years.


In short, the idea that protectionism is the road to riches is logically and historically monstrous.  Trump needs a new big idea.


*  *  *  *  *


This Hedgeye Guest Contributor research note was written by Benn Steil and Emma Smith. Mr Steil is director of international economics at the Council on Foreign Relations and author of The Battle of Bretton Woods. This piece does not necessarily reflect the opinion of Hedgeye.

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