Clem Sunter

January 2016: The Flagwatching Bulletin

2016-01-28 11:49

Clem Sunter

At the end of 2015 I picked a list of flags to watch and told potential investors to be wary of the stock market in case of a double dip scenario called Forked Lightning. The progress of South Africa could be measured by the Rand. Here is an update.

The oil price

Since December the oil price dipped below $30 a barrel and has recovered slightly to be back above $30. Rumours abound that the World Bank and the IMF are drawing up plans to shore up the solvency of the oil-producing countries by providing them with liquidity in the hard times. Meanwhile the US fracking industry must be suffering heavy losses as the breakeven price of oil is at least $50 a barrel for them and much of their investment was financed by loans, not equity. This is still a precarious situation requiring a doubling of the oil price to remove the endemic risks.

The Forked Lightning Scenario

Given the global stock market dip already this year of around 8%, Chantell Ilbury and I have raised the probability of this scenario from 15% to 20%. The triggers for this scenario have always been shocks to the financial system, and the likelihood of a major national or commercial debt default somewhere in the world has been rising. The US FED has issued a very cautious statement for near-term economic prospects and told us to keep an eye on the risks as they unfold. In my terminology, that means closer watching of the potential red flags. Just as the declining quality of sub-prime mortgages heralded the crash of 2008, now it could be the same for national and commercial debt. In particular, watch US property prices in the next six months as a fall in them is an indicator of a bear market in US equities.

Global temperatures, floods and droughts

According to NASA and the US National Oceanic and Atmospheric Administration, 2015 became the hottest year on record by a remarkable margin, meaning that average temperatures across the planet were 0.9 degrees centigrade above the 20th Century average. Part of this was due to the El Nino effect of significant warming over the tropical oceans. We are well on the way to the increase of 2 degrees centigrade reckoned to be a game-changer for the planet’s atmospheric future. 15 of the 16 warmest years have occurred since 2000, with 1998 as the lone pre-21st Century year. India and China will be building several thousand coal-burning power stations in the near future despite the pledges made in Paris in December. That will offset the savings in America and elsewhere.

The drought in South Africa combined with the unusual heat is becoming desperate for farmers. This could turn into a full-scale crisis if major urban areas start running out of water.

The Chinese economy

One of the additional risks that seem to be creeping in is the accuracy of the statistics. Most countries would die for a 6% annual economic growth rate and many economists are perplexed that a slowdown in China is being seen as such a tragedy. Remember China is a much bigger economy now and a smaller percentage growth figure represents a bigger chunk of additional economic activity. However, suspicion means uncertainty and, given the disaster of sub-prime mortgages, we need more transparency on how the Chinese economy is growing in order to make rational investment decisions.

A global pandemic

The mosquito-borne Zika virus has emerged in Brazil and other South and Central American countries, which medical experts are saying can adversely affect the unborn babies of pregnant women. Travel advisories have been put in place. This is the year of the Olympic Games in Brazil so the epidemic must be carefully watched.

The porous border flag

This flag is changing the game in Europe as we speak. Denmark has made it plain with recent legislation that it really does not want to see the volume of migrant flows that happened last year and the German population seems to be wavering. Still the migrants come and the focus has moved to Greece which is ill-prepared to take on the role of first line of defence. Apart from financial worries, Greece has simply not got the space to absorb the migrants that last year were in transit through Greece on their way to Germany, Austria and France. This is a very cloudy flag as it could mean the reintroduction of border controls across Europe and in the worst case scenario a break-up of the European Union. Meanwhile, it is winter and conditions inside the refugee camps are worsening.

The war in Syria

We now have the prospect of a genuine attempt to bring the war to an end with a possible federation model that allows the various elements of the population considerable freedom to govern their own provinces. Will the Russians and Americans bury their differences on this issue for the greater good of humankind? We will have to wait and see.

The South African municipal elections

The battle between the parties is already heating up. The harshness of current economic conditions in this country will play a role in the result as will the quality of service delivery. This is a crunch moment in our new democracy.

Disclaimer:

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