Oil

We focus on Brent as the global benchmark.

Brent was unchanged on the week at $42.85 / bbl.  But supply continues to creep upwards and a major source of demand is disappearing.

On the supply side, the US rig count has risen 10% in the last four weeks.  And Libyan exports have risen from zero to 500 kbd in a month, whilst Iran is getting nearer to opening its new pipeline in the New Year.

Meanwhile on the demand side, China has finally hit the brakes on its buying binge due to "swelling inventories and limited import quotas".  The world's largest importer had added 1.7mbd to storage between January and September.   

The OPEC+ cartel therefore has a familiar problem, as its Secretary General noted:

“We have to be realistic that this recovery is not picking up pace at the rate that we expected earlier in the year.”

The issue, as history has proved is that, "OPEC is like a teabag - it only works when it is in hot water".  And today, the pressure is once again on countries to increase their income by raising volume.

S&P 500

We focus on the US S&P 500 Index as the world’s major stock market index.

The Index was also unchanged on the week at 3484.  But the VIX volatility index pushed up by 10% - suggesting a change in trend may be nearing:

• Market chartists are increasingly highlighting technical signs of an impending pull-back
• The risk of a disputed election is starting to move sentiment from greed to fear
• A Biden win could well lead to a market sell-off, as investors locked in gains before tax hikes

The S&P has been a momentum-based market for some time, where sentiment rules rather than earnings fundamentals. And so the technicals may give early warning if a new sell-off threatens.

Interest rates

We focus on the US 10-year rate, as this is the “risk-free” benchmark for global markets.

The rate slipped to 0.74% from last week's 0.77%, after a dramatic mid-week collapse to 0.70%. But the week's main event was a major speech from Fed Governor Quarles, responsible for market supervision, reviewing the market collapse in March and noting that:

"Treasury market conditions deteriorated rapidly in the second week of March, when a wide range of investors sought to sell Treasuries to raise cash. Foreign official and private investors, certain hedge funds, and other levered investors were among the big sellers. During this dash for cash, Treasury prices fell and yields increased, a surprising development since Treasury prices usually rise when investors try to shed risk in the face of bad news or financial stress, reflecting their status as the ultimate safe asset....The intense and widespread selling pressures appear to have overwhelmed dealers' capacity or willingness to absorb and intermediate Treasury securities." (our emphasis)

Fed Governors do not normally talk in these terms. And we can understand his concern, given that $12.5 trillion of Treasuries traded in a single week during March. Luckily, volume returned to more normal levels within a month, enabling the Fed to do its job of being the 'lender of last resort'. But clearly Quarles is anxious that the problem has not been solved - and his unspoken question is 'What might happen if the next crash is bigger?'

Aging populations and consumption

Consumption is 70% of GDP in the USA and most Western countries.  Therefore the next 10 years will likely see a major slowdown in growth as the economic dividend created by the Baby Boomers evolves into an economic deficit:

• As the chart shows, the US population has more than doubled since 1950, from 157 million to 333 million today. It will be 356 million in 2030
• But this increase will be due to rising life expectancy, not babies being born. The majority of the growth will be in the Perennials 55+ generation
• As the second chart shows, this is bad news for consumption, which peaks around the age of 55 due to the Perennials being essentially a replacement economy
• They are not having babies, and already own most of what they need. Their incomes also reduce as they enter retirement

Central banks took the credit for the explosion in demand that occurred from the 1980s as all the Boomer babies entered their Wealth Creator years. This is when people settle down, often have babies, and see their earnings increase as they move up in their careers.

Now, the banks' stimulus programs are effectively trying to 'print babies' to replace the consumption lost due to the rise of the Perennials. But instead, of course, they are simply creating record levels of debt - which can likely never be repaid.