If today we are in the year 2016 and not in the year MMXVI it is because a young Pisan, son of the merchant Bonacci (and therefore called Fibonacci), learned from Arab merchants in Algeria the numbering system which is in use today all over the world and took him to Europe. This system, which we call Arab, it was actually invented by the Indians, who taught it to the Persians, who passed it on to the Arabs before it finally came down to us in 1202, four centuries after its publication in Sanskrit.
Fibonacci, considered the greatest mathematician of his time, also brought to Europe the sequence named after him, already discovered in India in the third century, and popularized it with the famous story of the rabbits. If a male and female are able to mate at the age of one month, and if gestation lasts a month and results in the birth of a male and female, then there will be one pair of rabbits in the world in January, one in February, two in March and then 3, 5, 8, 13, 21, 34, 89 and so on. This sequence has a remarkable occurrence in nature, for example it explains how crystals and many other spiral objects are formed including, perhaps, even galaxies. The pattern has been around for some time in technical analysis, but it only has any value as long as a trend lasts.
That is, it is unable to predict the most important thing, the moment of reversal. And if every now and then someone, like Buffett, manages to become very rich with fundamental analysis, no equally great wealth has been accumulated thanks to Fibonacci, with all due respect to those who try new paths. Assuming that the decline in oil will continue with the rhythms and cadences of recent months, an RBS analyst has predicted, using Fibonacci, that crude will drop to $16. The press and the markets didn't hesitate to go and see if the 16 dollars could be arrived at with a broad examination of global supply and demand, of the geopolitical framework, of the competition from other energy sources, etc. or if instead it could be arrived at with a nice magic formula within the reach of a child. The message that has remained is that for RBS crude oil will go to 16, full stop.
The same happened with Morgan Stanley. Everyone knows that he spoke about oil at 20, few have bothered to verify that the forecast is conditional. If the dollar strengthens, says MS, and if the renminbi depreciates significantly, then we could see oil in the $20s. We ask, is the dollar revaluing? No, the DXY weighted index is at the same level as it was two months ago. Is it then perhaps massively devaluing China, notoriously on the verge of the abyss? It doesn't turn out. The renminbi on the free market had reached 6.53 against the dollar in August and is now at 6.60. It is a one percent devaluation, like when the euro falls from 1.09 to 1.08 ten times a month. It doesn't matter, the message that remains and spreads virally is that crude oil will go to 20 and end up falling apart like China, end of analysis, end of story. Then someone from Standard Chartered came and talked about $10. At this point we try to jump too. If the right bacteria are found to transform water into fuel in a few seconds, oil will drop to zero and then go to a negative price.
Petroleum is in fact bulky, smelly and highly flammable and whoever has the misfortune to have it will pay to get rid of it. And now we wait for the headlines in the newspapers, Per Kairos Petrolio Sottozero. Twenty, ten, zero or subzero, the fact is that oil for May 2017 delivery is still at $40. Producers, to decide whether to continue extracting or to close down, look more at the forward price than at the spot price, which perhaps falls only because there is no longer room in deposits. If I can still sell at 40, reasoned the producer, I try to stay in the game and wait for some competitor to jump before I jump. This is why oil will still be under pressure for some time to come, not Fibonacci. It remains to be understood how the rule was established whereby stock exchanges must follow the trend of crude oil step by step. You can understand it in part for America, which produces almost as much as Saudi Arabia, it is less understood for the Eurozone and Japan, which don't have a drop of oil. That the German stock market, so weighted on the car, falls because petrol costs less and less makes a certain impression. Little is sold in China, they say.
False, because thanks to the car purchase incentives introduced after the August crisis, sales in China have gone very well in recent months. It will also sell, it says, but the weaker renminbi penalizes profits once they are converted into euros. Really? We understand that exactly one year ago it took 7.3 renminbi to buy one euro, while today 7.2 are enough. The renminbi, for us Europeans, is stronger than a year ago, but the European stock markets are lower. And a year ago, at this time, there was still neither Qe, nor the prolongation of Qe, nor the European cyclical recovery. So what explains the drop in the markets and, even more so, the widespread and profound pessimism of this period? We advance two hypotheses. The first is that the only remaining buyer on the American stock market has disappeared (don't worry, he'll be back soon). If private individuals, hedge funds, foreign and sovereign wealth funds are sellers and if long only funds, traditional buyers at the beginning of the year, remain firm, then the burden of supporting the market falls entirely on the buybacks of treasury shares by companies .
However, it is not well known that buy-backs in America are not permitted in the five weeks preceding the announcement of earnings, which is concentrated between the second half of January and the first week of February. Since the buyback programs have not been cut and in some cases have been increased, we will see buyers in the market again in the next few days. We will therefore have, at the very least, less volatility and probably a little more colour. The second hypothesis is that Stanley Fischer's confirmation of four rate hikes for this year was not liked one bit. In the past months, the markets have always been told that the increases would only occur with a strong economy. The concept of the macro data-driven Fed has introduced more volatility into the markets, but made them believe that any macro weakness would be softened by a slower rate hike process. Fischer, however, did not set conditions for the four hikes. Perhaps he assumes that the economy will be strong, but what markets are seeing right now is weak growth and a Fed that, equally, wants to go ahead with hikes.
Of course, the weakness of recent weeks includes the disposal of inventories accumulated in recent months, but the markets, as we have seen, are never too subtle. It would therefore be good for the Fed to clarify his thinking and stop competing with the Chinese central bank to see who communicates worse. 2016 is shaping up to be a tiring and unrewarding year, but not a tragic one. Eventually we will grow more than last year and inflation will not be as low as many fear. As Gundlach said, however, it will not be a year to be heroes and it will be better to take a more defensive profile, selling on the upside more than buying on the downside. Medium and long government bonds, on the other hand, won't give us the bear market expected since 2016 even in 2009. Exchange rates stable, the yen stronger than weak.
