The Daily Dose

-Recession, recession, recession.

-In times of panic, those in charge are prone to mistakes.

Markets are in a state of panic, with recession the buzzword of the trading day. The price for Brent crude oil briefly collapsed below $50 in overnight trading, though a Saudi proposal for deeper production cuts offered some respite. The deeper the sense of panic, however, the greater the chance for mistakes.

Brent crude oil hit $50.55 at 8 a.m. ET, down some 2.3% from the previous close. Brent is on pace for a 14% drop on the week and most major markets are officially in correction mode. The bloodbath is triggering extraordinary responses from global managers, with Riyadh posturing for a 1 million barrel per day cut at OPEC’s meeting in Vienna next week.

“Oil traders price in coronavirus-driven recession,” reads the Friday headline in a Reuters piece from John Kemp.

Kemp notes that US interest rate traders are betting on another cut, adding to the support offered last year to keep the world’s largest economy humming along. That support came on top of the tax relief offered by President Trump at the start of his administration, relief that’s set to expire at the end of his first term in office. The global economy caught a break with the thawing of the Sino-American trade war, though the outbreak of the coronavirus dealt a knock-out punch to markets and the global economy is on pace for “a double-dip slowdown or even a recession,” Kemp writes.

Fed rates are already low, leaving managers with little room for further maneuvering to arrest a decline that’s already wiped millions of dollars from major markets. US durable goods orders for January showed contraction, French GDP declined sequentially and German unemployment came in worse than expected. Pitching a 600,000 bpd cut early this month, Saudi Arabia is doubling down as the economic carnage continues. Lower demand from China, the ground-zero for the coronavirus outbreak, has prompted the Saudis to cut March shipments by at least 500,000 bpd, Reuters reported, citing sources with knowledge of the matter.

capture

Charles F. Doran, an international relations theorist at Johns Hopkins, observed that the power of nation states follows a regular cycle of ascendance, maturation and decline. What a state wants to do – the way it behaves in the international community – is a function of this cycle. An ascendant power greets external stimuli one way and a descendant power views that same factor through a completely different lens. The most likely points for erratic state behavior are at the points of maximum and minimum power and the two inflection points of that regular pattern. Those points, Doran says, are where exaggerated fears, misperceptions and over-reaction are most intense. Economies also follow a regular pattern of growth, stabilization and decline. If we decouple Doran’s thesis from international relations theory and apply it to current market conditions, it is reasonable to suggest that economic managers are going to make mistakes.

 

Graph taken from:
War and Power Dynamics: Economic Underpinnings
Author(s): Charles F. Doran
Source: International Studies Quarterly, Vol. 27, No. 4, Special Issue: The Economic Foundations of War (Dec., 1983), pp. 419-441

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