In June of this year, Kurt Kallaus, author of Exec Spec and the KDelta trading model, gave his outlook for a mild cyclical upturn in the US economy and oil topping out and turning lower into the fourth quarter. Both of those things have played out as he outlined two months ago.
In our most recent conversation with him on our podcast, Kallaus still sees oil prices drifting lower, reiterates his view that the US could escape recession for another two to three years, and outlines a number of key metrics for investors to monitor.
Oil Prices Likely to Remain Subdued
In the past few weeks, we've seen oil prices strengthen back into the mid-40s and much of this is predicated on rumors of Saudi Arabia and Russia leading the charge for OPEC production cuts, Kallaus said.
If the Saudis are able to sustain higher prices with production cuts, they’ll just be handing over market share to producers outside of OPEC, he added, which will help frackers come back online and lead to more substitutions by other countries in other areas of energy.
“While there’s always the chance prices can rise back to their recent highs in the low 50s," said Kallaus, "the odds favor still more price deterioration perhaps into the 30s once again as the year unfolds,” Kallaus believes.
Industrial Production Signals Some Growth, But Not Much
The latest rebound in industrial production growth numbers from their lows is a helpful confirmation of the mild cyclical upturn we're now experiencing, Kallaus said.
Despite this improvement, though, he doesn’t see a lot of great signs for the economy at large and reiterates that any growth will be quite modest.
“We’re certainly not worried about inflation, an overheating economy or credit tightening from that standpoint,” he noted. “The signs of growth are not exciting, but the important thing here at this point is that we stay away from recession and that we have enough stimulus in place that really can not be removed.”
Though he thinks we’ll escape a recession, for now, Kallaus sees a long-term issue forming with demographics.
“It’s long been expected that there would be a difficult time for consumption rates to keep up, for capacity being in excess to service all the Baby Boomers who are retiring and moving on,” he noted.
Despite a global injection of trillion, bringing interest rates into ever lower or negative yield, our efforts appear to have had little to no effect, and we’ve had to keep up stimulus just to maintain sluggish growth, he said.
“The cause of this, in my opinion, has always been aging demographics of wealthy, developed countries, who’s former growth rates can’t yet be supplanted by the healthy age demographics of emerging nations,” Kallaus said. “This is why we see excess capacity rising during an expansion for the first time.”
We’re stuck between stall speed and liftoff, he added, and the painful debt deleveraging that’s needed hasn’t been allowed to take place.
He plans to watch demographic indicators as we move into an “entitlement era,” as he puts it, of reducing demand and excess capacity, until Millenials or emerging markets take over.
“It’s a trillion dollar question … in timing this economic cycle peak,” Kallaus added. “The central banks cannot allow the markets to collapse given the debt they’ve created out there and the panic that would ensue."