Oct 31

King Dollar in a Bull Market

Gold Price Comments Off on King Dollar in a Bull Market
But change your goggles and hey! Commodities in AUD not too bad…!

BORING as it sounds, I want to talk a bit about the end of US QE today, writes Greg Canavan in The Daily Reckoning Australia.
Because it’s very important to how markets are going to behave over the next few months.
As you probably know, yesterday the US Federal Reserve voted to end its policy of quantitative easing. But it will still be reinvesting the interest payments from its $4 trillion plus portfolio and rolling over any maturing treasury securities, so it’s balance sheet will continue to grow, albeit much more slowly.
On the surface, US markets didn’t seem too fussed about the end of an era. Shares sold off around the time of the Fed’s statement and then rallied towards the close. Probably a case of “algo’s going wild” as automated high frequency traders tried to make sense of the Fed’s statement.
And the Fed did its usual job of promising to hold rates as low as they possibly could, which markets seemed happy enough with.
But the real action took place under the surface. That is, the US Dollar spiked higher again. This is an important point because when the US Dollar rallies, it usually signifies tightening global liquidity.
Think of it as liquidity returning to the source (US capital markets) and drying up…or disappearing. That’s certainly what has been happening these past few months. Since bottoming in May, the US Dollar index (which measures the greenback’s performance against a basket of currencies) has increased by nearly 9%.
That might not sound like a huge spike, but in the world of currency movements, it is. Imagine if you’re an exporter and your product just became 9% more expensive…chances are it will lead to a drop in sales as customers look for a cheaper substitute.
This is the problem with the end of QE. It leads to liquidity evaporation as ‘punt money’ returns home…which leads to a strengthening US Dollar…which hurts sales of US multinationals.
It’s not going to happen right away though. Most companies have hedging strategies in place that protect them from sharp moves in the FX markets. But if Dollar strength persists…and the chart above says that it will, then you’ll see the strong Dollar hitting companies’ revenue line in the coming quarterly reports.
Not only that, but the evaporation of liquidity in general could lead to another bout of selling across global markets. QE is all about providing confidence. Liquidity is synonymous with confidence. Take it away and you’ll see the mood of the market change.
Getting back to the Dollar strength…it’s a headache for Australia too. It’s smashing the iron ore price, and the Aussie Dollar isn’t falling fast enough to keep up. In terms of the other commodities though, things aren’t quite so bad.
All you seem to hear lately is negative news about commodities. That’s because the world prices commodities in US Dollars, and as you’ve seen, the US Dollar is a picture of strength. But if you look at commodity prices in terms of Aussie Dollars, things look a little better.
The chart below shows the CRB commodity index, denominated in Australian Dollars. It’s a weekly chart over the past five years. And y’know what…it doesn’t look that bad! Since bottoming in 2012, it’s made considerable progress in heading back to the 2011 highs.
But you’ll want to see it start to bottom around these levels. If it doesn’t, prices could head much lower.
The thing to note about this chart is that it doesn’t include the bulk commodities – iron ore and coal. These commodities tend to dominate the headlines in Australia. Things like nickel, tin, copper and oil don’t get much of a look in.
Which reminds me, in case you missed it, Diggers and Drillers analyst Jason Stevenson recently released a report on some small Aussie oil ‘wildcatters’. With the oil price low, now could be a good time to sniff around the sector.
You could say that about commodities across the board. In the space of a few years, they’ve gone from hero to zero…or the penthouse to the…
That usually means there could be some good value around. One thing you need to look for in the current environment is a decent demand/supply dynamic. Iron ore in particular is heading towards massive oversupply next year. I reckon that makes it a poor investment choice for the next few years.
You’re better off to wait until the China slowdown and supply surge knocks out the juniors and all the marginal producers….leaving the market to BHP and Rio. You’ll then probably be able to pick these mining giants up at much lower levels.
Once you find a commodity with good supply/demand fundamentals, you need to make sure the producer is low cost. That protects it against further price falls…or a rise in the Australian Dollar.
It also protects it against foreign competition. One of the issues with the Aussie resources sector in recent years is costs. Other countries have much cheaper capital and labour costs and can therefore get stuff out of the ground cheaper than us.
That brings me to a final issue: Australia doesn’t really invest in its own resource sector. Via superannuation, we have a huge pool of capital. But this mostly goes into the banks or the major miners. Superannuation capital is not high risk capital.
That means a lot of the capital that flows into the resource sector is foreign. And when global financial conditions change…like the end of QE and the strengthening of the US Dollar…that capital departs.
This will create problems and opportunities for the sector. But given the bearishness towards commodities in general, it’s probably time to start getting interested again.
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Jun 02

From Iron Ore to Bilderberg

Gold Price Comments Off on From Iron Ore to Bilderberg
If an evil plot takes place in the open, does it have any hope of success…?

SHH! urges Dan Denning in his Daily Reckoning Australia.
Did you hear that? There it was again…the sound of the iron ore price falling.
The price of Australia’s biggest export (and driver of national income) has fallen for six straight months. The spot price of iron ore was down 13% in May and 4.1% in New York on Friday. Now at A$91.80, Western Australia’s big money earner is at its lowest level since September 2012.
What to make of the iron ore price decline? Intrepid Diggers and Drillers analyst Jason Stevenson is not daunted. In fact, he’s aiming to cash in on the dip, which is probably just the way you want your resource analyst to look at markets. To me, it’s just the sort of signal that precedes a market correction. Couple it with the chart below, and you should be on your guard for June.
Volatility isn’t inherently evil. Traders love it because it’s associated with big price swings. But the important point about the chart above is that when the VIX spikes from a low – and you can see it’s making lows in the chart above – stocks fall quickly. The S&P ASX/200 fell almost 10% between May 10th and June 7th of last year (see big VIX spike). The spike earlier this year came right before a 5.53% fall in stock prices.
En guarde!
Yes, yes. I know what you’re thinking. Australian stocks cannot possibly fall when the official May Chinese Purchasing Managers Index showed a 50.8 reading. (You were thinking that, right?) It was up from 50.4 in April. A reading over 50 indicates expansion. And this speaks to Jason’s point that if China wants to, it can step on the accelerator, print money, and rev up the world’s manufacturing engine (which would be great for junior and mid-tier iron ore stocks).
But if you’ve learned one thing in the last ten years – at least if I’ve learned one thing – it’s that the authorities are never as competent as you think. The world is so complex now, and so interconnected, that politicians and bankers are making it up as they go along. That knowledge is not comforting to a certain kind of subservient mind. But it’s the truth. The authorities are morons.
You’ll probably see that later this week when Mario Draghi meets with the board of the European Central Bank (ECB) to discuss policy. Draghi is the new European incarnation of Ben Bernanke, while Janet Yellen is Ben’s new female incarnation. By that, I mean that both promise to make ‘war’ on deflation and thus pump up stock prices. If Draghi disappoints, markets will fall.
Or take the Bilderbergers. For years, mostly before the internet, people who knew about them didn’t know that much. It was a shadowy, elitist, globalist movement of power brokers. They’d meet in exclusive hotels in isolated locations. Nobody knew what they talked about. But the common suspicion is that they were planning, nurturing, and executing an anti-democratic new world order/police state.
That’s probably not far from the truth. But the official agenda from their meeting this weekend in Copenhagen is disappointingly banal. Take a look at some of the items up for discussion.
  • Is the economic recovery sustainable?
  • Who will pay for the demographics?
  • Does privacy exist?
  • How special is the relationship in intelligence sharing?
  • Big shifts in technology and jobs
  • The future of democracy and the middle class trap
  • China’s political and economic outlook
  • The new architecture of the Middle East
  • Ukraine
  • What next for Europe?
You see. It’s all out in the open now. It wasn’t ten years ago. But now, Google’s Eric Schmidt will rub toes with Christine Lagarde of the International Monetary Fund (IMF) over canapés to discuss privacy. NATO Secretary General Anders Fogh Rasmussen will meet with UK Financial Minister George Osborne to discuss the merits of financial warfare in Ukraine versus armed conflict. And so on.
Of course I’m making all that up. I have no idea what specific conclusions they will reach, if any. But you don’t have to be Nostradamus to figure it out. Here’s a 30-second version:
“The economic recovery is not sustainable. The dysfunctional global Dollar/debt system has merely been papered over with more sovereign debt. The middle class will get screwed and young people especially.
“To prevent economic dissatisfaction from leading to social instability that undermines the legitimacy of nominally democratic governments, intelligence agencies will have to share information and use technology to create a virtual police state that keeps people in-line. Robots and software bots will be deflationary for wages and the number of jobs human beings do. Rather than liberating, this will further destabilise society and create an even greater need for police state control through technology.”
There. That wasn’t so hard was it? In the meantime, keep your eye on the iron ore price.
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