As worldwide Quantitative Easing is reversed, liquidity is drying up; Interest rates are rising and, as if it were the tide going out, weak countries and companies with debt that has dragged them to the bottom, are revealed.
As a result, stock markets are falling. The US stock market fell 2.5 per cent on 21 October so that the aggregate market gain of 2018, has been lost. Rising US interest rates hold the Dollar strong despite the growth of US deficit funding. Huge foreign holdings of dollars make it the strong port in any storm.
The US tax reform has contributed to low unemployment, rising wages and excellent growth. The potential for overheating means the Federal Reserve continues its programme of interest rate rises and feeds the strength of the Dollar. All of this strengthens President Trump’s arm in his trade wars.
China is feeling the pinch. Weighed down by debt, much of it used to fund non-income bearing municipal projects (a new town square, for instance) or fund old-line industries producing surplus capacity (steel production, for instance), China is struggling to rebalance its economy and push domestic demand.
Exports are more than twice as important to China as they are to the US. The US is China’s number one market. This is why China is finding a solution to President Trump’s strategy to bring China’s theft of intellectual property and unbalanced trade terms, painful.
In this turbulent environment, the EU adds its spoon. Italy is fighting back. The economic damage inflicted by the adoption of the Euro and the concomitant EU policy of forced internal deflation by cutting government spending is no longer acceptable to Italy’s current political leaders.
The Italian threat, posed by its unwillingness to meet EU budget rules, comes at a time when the threat of leaving the Euro and returning to the Lira has real meat. Italian sovereign debt is 2.3 trillion Euros. German and French banks have shed-loads of it.
Deutsche Bank and Commerzbank, Germany’s two largest banks have both failed to meet stress tests which measure their ability to withstand financial shocks. Deutsche Bank, on the back of three consecutive years of annual losses, has posted a 65 per cent drop in quarterly profits. Its shares fell nearly 5 per cent on 21 October. Furthermore, it is estimated that French Banks have an exposure to Italian debt that is equal to 11 per cent of GDP.
A return to Euro would mean a write-down of Italian debt, a write-down which could collapse both Deutsche Bank and Commerzbank and question the viability of the European Central Bank through which Germany has taken on an estimated 500 million Euros of Italian debt.
The Eurozone has reported its weakest growth for two years and manufacturing orders fell for the first time since 2014 according to a report in the Daily Telegraph. This follows an earlier report that the UK has outgrown both Germany and France significantly since joining the EU.
I remember the dire consequences trotted out by the UK government at the time we considered Euro membership. The Treasury, Prime Minster and Chancellor all piped disaster if we failed to join. How familiar their forecasts of a lost future were to those we hear today concerning Brexit.
How wrong they were. However, we are in a very volatile and less than benign economic environment and Brexit is merely adding to these worries. Meanwhile, developing countries who have used Dollar debt, are squealing in pain. Turkey, a major player in the supply of shotguns and airguns, is mired in the weakness of its currency on the back of the inexperienced management of its economy.
Five years ago, a pound was worth just three lira, and today it is nearly nine. Recently, the lira has recovered somewhat against the pound. Today, perhaps due to the political hold that energy-poor Turkey has against oil-rich Saudi Arabia over the murder of the journalist, Jamal Khashoggi, we might speculate that the outlook for Turkey has improved.
This sad and politically explosive event has ramifications not just for Turkey but for the oil market and Saudi Arabia’s relationship with the UK, amongst others obviously. To understand this you need to have a little background perspective.
The acronym, OPEC, stands for Organization of the Petroleum Exporting Countries. The following countries are members of the organization: Algeria, Angola, Ecuador, Gabon, Iraq, Iran, Qatar, Kuwait, Libya, Nigeria, Saudi Arabia, Venezuela, and the United Arab Emirates. OPEC member countries produce about 40 percent of the world’s crude oil and OPEC’s oil exports represent about 60 per cent of the total petroleum traded internationally.
OPEC’s actions influence international oil prices. Saudi Arabia is OPEC’s largest producer and what it says and does frequently affects oil prices. Saudi Arabia’s influence on prices and on OPEC has diminished as the US has moved towards self-sufficiency in energy and Russia and Iran have come under US sanctions and less willing to assist the OPEC cartel.
In 2017, the average annual OPEC oil price per barrel was $52.51. So far this this year it has averaged $69.42 per barrel. From Turkey’s perspective, Saudi Arabia represents a potential economic solution to rising energy prices and supply. Saudi Arabia is a contender for Arabic religious and political leadership at a time when Turkey is trying hard to spread its wings.
Furthermore, President Erdogan’s grasping of dictatorial power has hurt inward investment into Turkey. Saudi Arabia’s sovereign wealth fund has the funds to plug this gap although run by a ‘competing’ Muslim sect. With the murder of Jamal Khashoggi, Saudi Arabia is now in a politically weak position.
Turkey is holding evidence and has some sway over how the Crown Prince and Saudi Arabia may be viewed. Turkey can take advantage of this and, indications are that this may be already in negotiation. These ‘world’ politically controlled events have vast economic impacts.
It is important for your business that you make decisions in light of the environment that is created. The stage looks set for a strong dollar and weaker oil prices. A firmer Turkish Lira may be seen, depending on what damaging evidence is ‘restrained’ by Turkey and what value is placed on it by Saudi Arabia.
China is ‘losing’ the trade war with the US and its currency has every reason to weaken. Germany and France have weakening economies. Italy and Brexit could be fatal to their long term recovery. The surprising speed by which Western consumers are willing to move to electric powered vehicles, if followed by driver-less trucks and cars, would be a potential death knell for Germany pre-eminence in premium car exports.
Few would have predicted this rate of change in vehicle power and few believed that the US electric carmaker, Tesla, would beat its profit forecast this quarter. Is there some radical change in the sporting gun industry we should be thinking about?