Thankfully, I was not in the global markets during the Black Death, the Great Plague and the Spanish flu pandemic but coronavirus cases have now crossed 40,000 infections and this is way beyond a local Wuhan outbreak. Despite the blowout 225,000 US January non-farm payrolls growth data, I am alarmed by the global recession SOS in the capital markets metrics I track.
One, the bellwether US Treasury ten year note has tanked to below 1.6% and the Uncle Sam IOU yield curve has inverted once again. Fear, not greed, obsesses the debt markets.
Two, Dr. Copper, the red metal with its mythical doctorate in predicting the global economic pulse, has been in free fall for a shocking fifteen successive sessions, last seen in 1984. Copper futures traders in New York seriously think the slump in demand (the PRC is the world’s biggest consumer) could see copper plunge from the current 2.59 to as low as 1.80 per pound. This is a classic advance indicator of global recession and it is flashing red alert.
Three, West Texas/Brent crude have fallen 19 – 20% in the past month, despite an escalation of geopolitical tensions in the Gulf, Libya’s oil terminal blockade and the fall of Sirte to General Haftar’s militia, rising political violence in Iraq and the Niger Delta, unrest in Algeria and Sudan, and above all, draconian US Treasury sanctions on Iran and Venezuela.
Jet fuel is 8% of global refined products market – and the price of jet fuel has plunged as 50,000 flights have been cancelled to China. An oil economist I greatly respect in a New York investment bank estimate a shocking 3 million barrels a day (MBD) fall in Chinese oil demand, 20% of the Dragon Empire’s daily consumption. No OPEC supply cut, even if Russia and Iraq were on board with the Saudi Arabian “swing producer” strategy, can remotely offset a demand shock of this magnitude. Can Brent fall as low as $45 or lower? Absolutely, yes.
The Chinese coronavirus is now a global pandemic, moving from the central Wuhan/Hubei province to the Pearl River Delta, Ground Zero in global supply chains and the economic engine of coastal China ever since the late Paramount Leader Deng Xiao Ping initiated his Open Door policy four decades ago. In the SARS outbreak in 2002, crude oil lost one third of its value even as the Bush White House planned to invade and execute regime change in Baathist Iraq. Yet China is vastly more critical to the global economy now then in 2003, a $14 trillion GDP colossus that is the world’s second largest consumer of crude oil. If China GDP growth plunges to 1%, as Wall Street hedge funds believe, Brent could easily fall 50% from its peak or $35 a barrel. This is not Cassandra call but pure black gold economics 101.
Four, I track the Baltic Dry Freight Index like a hawk because shipping freight rates are a proxy for world trade. This index scared me from buying DP World at its IPO price of 1.30 in November 2007 as it had begun falling in that fateful summer. I even wrote an article predicting the IPO would fall from $1.30 to below $1 on the NASDAQ Dubai, though local bankers offering high octane leverage were predicting a $3 – 4 post IPO open, making used car salesmen look like fountainheads of financial conservatism and ethical behavior.