Do you feel financially much safer than you ever have? Are you convinced that you will not see another financial crisis in your lifetime?
But apparently we’re wrong. At least according to US Federal Reserve Chairperson Janet Yellen.
Confirming once more that central bankers are clueless, she said the following on live TV in London on 27 June:
‘Would I say there will never, ever be another financial crisis? You know probably that would be going too far but I do think we’re much safer and I hope that it will not be in our lifetimes and I don’t believe it will be.’
No, you didn’t read that wrong. Yellen believes the world won’t see another financial crisis in our lifetime.
I’m not sure what’s worse. That comment, or Ben Bernanke’s gaffe in 2007. That’s when the former US Fed chairman said the housing bubble was contained. Of course, Bernanke also said there wasn’t a housing bubble in 2006.
Famous last words.
Janet Yellen will also be in for a rude shock. The world is facing a major financial crisis…and yes, it will come in our lifetime.
The Institute of International Finance (IIF) tracks global capital flows. It has a good reputation for sniffing out risks. IIF calculated that global debt levels stood at US$217 trillion last month.
That’s 327% of global GDP…
And there won’t be another financial crisis?
Crude oil getting destroyed
Looking around the world, there are lots of good economic indicators. One of my favourites is the crude oil price.
Crude is used in multiple industries, particularly transport. It’s also used in food. As a matter of interest, I’m not talking about vegetable oil either. It’s used in lollies, laxatives, mints and chips — plus much more. Kitchen items, clothing and furniture also use crude oil. Interestingly, petroleum is used to make clothes colourful and non-flammable.
With its widespread use, crude provides a good picture of how the global economy is tracking. And as you may know, I’m extremely bearish on the crude oil price.
Since it started trading around the mid-US$50 per barrel range, I have been sounding the alarm bells. I won’t go into too much analysis today. But the world is swimming in crude, while demand remains anaemic. The so-called experts have disagreed with me all year. But that’s starting to change.
CNBC reported on 29 June:
‘Goldman Sachs has downgraded its forecast for oil prices over the next quarter amid a sudden uptick in shale drilling and an unexpected surge in production from Libya and Nigeria.
‘The investment bank now points to a three-month average of $47.50 per barrel for WTI crude, down from its previous estimate of $55.00 a barrel.’
Investment and commercial banks have been wrong for so long, you just can’t take them seriously anymore. Similar to Ben Bernanke, they didn’t forecast the US housing crisis. Today, they have been proven wrong again with crude.
The crude price fell to US$42.08 per barrel last month. It’s trading at US$44.50 per barrel today. And while crude’s likely to remain volatile, I ultimately believe it will retest the 2016 low. That’s not great news for the world economy. To make matters worse, not many people are paying attention.
The short-term story looks terrible…
Corporate earnings to take a hit
The crude oil bounce led to a recovery in earnings forecasts. Yet, despite it starting to fade, earnings estimates haven’t been revised lower. The Financial Times provides a bit more detail:
Source: Financial Times
[Click to enlarge]
The chart shows the energy sector should post a 396% earnings gain, on a year-on-year (YOY) basis, for the last quarter. The results are due out by the end of July. However, given the latest fall in oil prices, expect to be disappointed. The crude price hasn’t really changed on a YOY basis.
Investment banks remain far too bullish on crude. Perhaps they have read too many positive central bank statements and rosy government projections. The oil price has started to reverse, which is a telling indicator. But the analysts refuse to admit defeat. Look at the analyst crude oil projections for the remainder of 2017, according to FactSet data:
- Second quarter: $51.96
- Third quarter: $54.29
- Fourth quarter: $55.72
The forecasts are based on a calendar year — not the Australian financial year. And with crude prices closer to $45 than $50, it’s probably not going to end well. When shareholders and analysts realise that earnings aren’t as great as they thought, it could trigger a 10-15% stock market correction.
While the next market dip may be short-lived, Yellen should brace herself for the coming financial storm. When crude oil prices hit fresh lows, expect an even deeper market sell off.
Editor, Markets & Money