Quick Thoughts on OPEC, ISM’s, GDP and Liquidity in 400 Words

OPEC Production Cut

Goldman’s Head of Commodity Research said yesterday, “OPEC’s pricing power is the highest it’s ever been.” The Saudi’s want oil in the $90 to $100 range. They see demand weakening globally, so they cut production. Importantly, they aren’t worried about losing global market share because US shale production is no longer the threat it had been due to shale’s declining productivity and declining rate of resource investment.

The China demand recovery hasn’t materialized like the oil bulls hoped. Makes sense given the property sector is already overbuilt and and the Chinese export economy isn’t getting any help from slackening European and the US demand.

Manufacturing Contraction and Q1 GDP

The Institute of Supply Management (ISM) released their March manufacturing survey data which came in below expectation and deep in economic contraction territory as did the New Orders series.

Diesel demand, a great real-time economic indicator is falling at a rate which has previously only been associated with recession.

The Atlanta Fed GDP Now estimate has moved from an intra-quarter high of 3.2% to 1.7% following the week ISM data. Economic growth in January was strong, but the weakening trend has been clear since.

Leading indicators of employment have clearly begun to roll. Namely, today’s JOLTS data that shows job openings declining from extraordinary levels, falling overtime hours, and decreasing demand for Temp staffing.

Commercial and Consumer lending was contracting before the regional bank crisis began. That trend of tightening lending standards is very likely accelerating.

Liquidity

So why has the S&P been going up? I have two guesses. First is hope remains for the “Immaculate Disinflation” scenario: No recession while inflation just melts away deus machina style. The better answer could simply be more central bank liquidity. The Fed and Treasury’s emergency lending facilities may not technically count as Quantitative Easing, but the Fed balance sheet is still rising and that sends a very powerful message to all the quantitative and quasi-passive trend following strategies, because when you look back, the data is quite clear: Risk assets go up when the Fed is injecting liquidity. Additionally, while the Fed and ECB have been trying to shrink their respective balance sheets (prior to the crisis), the PBOC and the BOJ absolutely have not. The transmission mechanism that translates Chinese money printing to the Nasdaq is a bit nebulous, but just like with Fed assets, the correlations to risk assets are reliably high.

In the end, the direction of risk assets will likely be determined by one thing: Secular inflation. If global central banks can stimulate growth through lower rates and quantitative easing, they will. But if our, somewhat now consensus secular inflation call is right, then we will have to deal with a whole new world of fiscal and monetary restraint. That will not be a painless transition.

Tim Pierotti is WealthVest’s Chief Investment Officer. 

Tim has over 25 years of experience in various aspects of the equities business. Prior to joining WealthVest, Mr. Pierotti spent seven years in Equity Research management roles at Deutsche Bank and most recently at BMO where he was a Managing Director and Head of US Product Management. Tim has 11 years of investment experience most notably as Head of Consumer Research and Portfolio Manager at The Galleon Group, a former NY based $8Bln Long/Short hedge fund. Tim is a graduate of Boston College and lives in Summit NJ.

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