Does China’s ‘bridge of death’ foretell a recession?

Monday, 5 November 2018
Melbourne, Australia
By Bernd Struben

  • Mainstream playing catch-up to Phil Anderson
  • Oil bulls running scared

Australians are no slouches when it comes to building bridges.

Just look at the Sydney Harbour Bridge. The iconic bridge was built in 1932 and stretches 1.5 kilometres over the bay. If you’re feeling adventurous…and have $170 to spare…you can even walk along the towering arches.

Over in the US, the Golden Gate Bridge was built around the same time. Completed in 1937, it runs for 2.8 kilometres and connects San Francisco to Marin County, California.

But when it comes to bridges these days, it’s hard to compete with China.

You probably heard about the new bridge China built from the mainland to Hong Kong. It just opened at the end of October. And it didn’t come cheap.

Financially, the bridge cost $20 billion. But the price in human life was far higher. According to the BBC, at least 18 workers died during the construction. Hence its unofficial title ‘bridge of death’ used among local media.

You can see a picture below:



chart image

Source: AP: Kin Cheung / ABC
Click to enlarge

The bridge stretches for 55 kilometres, making it the longest sea bridge in the world.

It’s another clear sign of China’s resurgence on the world stage.

But could it be signalling something else?

We’ll get back to that, after the markets.

Markets

Over the weekend the Dow Jones Industrial Average closed down 109.91 points, or 0.43%.

The S&P 500 lost 17.31 points, or 0.63%.

In Europe the Euro Stoxx 50 index finished up 10.20 points, or 0.32%. Meanwhile, the FTSE 100 fell 0.29%, and Germany’s DAX closed up 50.46 points, or 0.44%.

In Asian markets, Japan’s Nikkei 225 is down 269.93 points, or 1.21%. China’s CSI 300 is down 1.41%.

In Australia, the S&P/ASX 200 is down 24.41 points, or 0.42%.

On the commodities markets, West Texas Intermediate crude oil is US$62.68 per barrel. Brent crude is US$72.40 per barrel.

(More on oil below…)

Turning to gold, the yellow metal is trading for US$1,233.92 (AU$1,714.02) per troy ounce. Silver is US$14.76 (AU$20.50) per troy ounce.

One bitcoin is worth US$6,436.38.

(For all the latest investment advice on bitcoin and the other major cryptocurrencies, go here.)

The Aussie dollar is worth 71.99 US cents.

Mainstream playing catch-up to Phil Anderson

We’ll get back to China’s ‘bridge of death’ shortly.

To put it in context, I want to review one of cycle’s guru Phil Anderson’s numerous accurate predictions over the past 20 years.

I’ve mentioned many of his astonishingly exact forecast to you before.

One I may have overlooked is his call on low interest rates for far, far longer than most anyone else predicted.

When the RBA cut the cash rate to 2.5% in August 2013, for example, most analysts believed we’d reached the bottom. And that low rates wouldn’t last for long.

Full disclosure, I was among them.

But when Phil came aboard with Port Phillip Publishing in early 2014, he had a very different forecast. He said Australian interest rates were going even lower. And that they could stay at record low rates for a decade…or more.

As we know now, the cash rate fell to 2.25% in February 2015.

The RBA continued to cut the rate by 0.25% increments until reaching 1.5% in August 2016. That record low rate, as you know, remains today. And if another Phil is to be believed — Philip Lowe, in this case — we likely won’t leave this interest rate trough for at least another year.

Now mainstream analysts are finally catching up to another forecast that Phil Anderson made a decade ago. That was back when the world was still reeling from the global financial meltdown.

Using his proprietary Grand Cycle Theory, he said the US…and the world…would enter a recession in 2019–20. Not a crash, mind you, but a mid-cycle slow down.

The most recent big name experts to echo Phil’s caution is the US$300 billion global fund manager Russell Investments.

From The Australian:

“The fact is Donald Trump, through his tax cuts, is pumping up the US economy on the fiscal side at a time when the unemployment rate is below 4 per cent. That will continue through this year and 2019, but unless you can actually come up with new fiscal stimulus it ends in 2020.”

Whether that will be marked by a hard landing remains in the balance, [Russell Pease, the London-based Australian in charge of investment strategy] said. “The potential for tears is quite high. It may end up in tears for Wall Street but may be not so much for Main Street… This recession is probably much milder because the imbalances aren’t quite the same. We know the government has got too much debt, we know corporates have been building up debt because of buybacks, but households have actually been pretty sensible this whole way through.”

Russell is obviously talking about US households being pretty sensible about taking on too much debt since the last crisis. In Australia, as you know, consumers can’t seem to borrow enough.

But Australia won’t lead the world into or out of any kind of global up or downturns. You need an economic juggernaut like the US to accomplish that.

And here’s what Phil Anderson’s been writing about that outlook recently. This excerpt comes from the 20 August issue of Cycles, Trends & Forecasts:

There seems to be no end of market bears calling a market collapse — again. And if you’ve noticed, it’s always “imminent”.

I say good luck with that one…

The worry for the Fed now is that there’s too much good news and they might be a little bit behind the ball. Which they usually are! It’s not surprising then that the Fed raised the cost of money for the seventh time in two and a half years. And there are probably more to come.

If you look at the history, it’s roughly 3.5 years on average, from when the Fed starts to raise rates to when a recession is likely to occur. We’ve highlighted that before in past Cycles, Trends & Forecasts issues for you.

The Fed started raising in December 2015, so that perhaps gives you something to watch for. Perhaps some sort of slowdown to come after mid–2019.

But don’t go expecting a complete market meltdown, as in 2008.’

History, and the picture it paints in charts, is a key element in all of Phil’s forecasts.

Which brings us back to China’s ‘bridge of death’. The longest sea bridge in the world.

Let’s hear more from Phil, writing in Cycles, Trends & Forecasts:

Here’s what happens when we go into the mid cycle peak, based on prior cycles:

  • The bond market starts to fuss. Just a little bit at first, but it gradually builds momentum.
  • Interest rates start to rise.
  • The yield curve in the US starts to flatten, and then threatens to invert.
  • Paintings offered for sale at auction houses break records.
  • Record IPOs line up to list on the world’s various bourses.
  • The world’s tallest, biggest and longest open up.

Indeed, recent months have seen all of this begin to play out.

And now China opens up the world’s longest sea bridge.

You may be tempted to write this off as a coincidence. I know I was.

But I suggest you do yourself a favour. Read this first.

Oil bulls running scared

Getting back to oil…

WTI crude dropped another 3.4% since I last wrote to you on Thursday. It’s now down 17.7% since 3 October. That’s when WTI was still trading at US$76.41…and the oil bulls were still eyeing a return to US$100 per barrel.

If you’ve been following along, you’ll know I thought that was nonsense.

I detailed why — not for the first time — in the 26 September issue of Port Phillip Insider.

That’s when I said if you agreed with my views and wanted a way to gain from a falling oil price, you could consider the ProShares UltraShort Bloomberg Crude Oil ETF [NYSE:SCO].

This is a double leveraged inverse ETF. If the oil price falls 5% it will gain roughly 10%. But leverage also brings more risk. If the oil price rises 5% the ETF will lose around 10%.

In the recent falling oil environment, it’s done quite well.

The ETF has gained 25.4% since 26 September. And it’s up 42.3% since oil’s 3 October peak.

What now for oil?

I’ve been writing since April that crude should fall below US$60 before the US-midterm election.

With less than two days to go, we need to see another 4.6% fall. That could still happen.

From Bloomberg:

Hedge funds reduced bets on rising West Texas Intermediate crude prices for an eighth straight week, the longest streak of reductions on record, even as curbs on Iranian oil are set to kick in. After sanction fears propelled the benchmark to four-year highs early last month, futures have since plunged almost 20 percent as signs mount that the impact might not be so bad.’

You can see the record slide in the chart below:



chart image

Source: Bloomberg
Click to enlarge

We haven’t seen much relief trickle through to the petrol prices yet here in Australia. That’s partly due to the weak Aussie dollar. And partly because there’s a lag between the crude oil price and what you pay at the pump for the refined produce.

But with the Aussie dollar inching higher and the oil price likely to track even lower, that could spell good news for those Christmas road trips.

Finally, here’s the latest on the upcoming Victorian elections from The Australian Tribune:

‘Victoria’s Labor Slammed Over Rising Taxes’

In 1789 Benjamin Franklin famously wrote, ‘In this world nothing can be said to be certain, except death and taxes.’

229 years later, Victorians know the truth of this all too well. According to a new political ad from the Liberal party, Victoria is the highest taxed state in Australia.

And Victorians will pay even more tax if…’

If you’re fed up with sanitised, politically correct dogma cut and pasted from one mainstream source to another then The Australian Tribune is for you.

And it’s absolutely free.

Sign up here to get The Australian Tribune delivered free to your inbox five days per week.

You can visit our website at https://www.theaustraliantribune.com.au/ to read the complete article above now.

Cheers,
Bernd