Ailing Copper Price,

 or Disconnect Between Stock Markets and Economic Reality

The fund management section of the Financial Times had an interesting article on May 13, 2013 discussing the disconnect between the stock markets and economic reality.

It took the view that the markets are in thrall to the unconventional measures pursued by the developed world's central banks, which have encouraged investors to take on more risk and hunt for yield.

As an example, Rwanda attracted orders worth nearly half of its $6.8 Bn gross domestic product for its recent $400 Mn bond issue. The yield on this 10-year bond was 6.875%. [Side note: the 10 year US Treasury bond is yielding 1.9% as of May 15, 2013.]

The reliably bearish Albert Edwards, strategist at Societe Generale, argues that the ailing copper price has been giving early warning that central bank liquidity will not save risk assets. He suggests bailing out of equities now and being overweight in government bonds on a short-term cyclical view that recessionary forces remain powerful. His longer-term argument is that we are only one short recession away from outright Japanese-style deflation, which will prompt further central bank hyperactivity and ultimately, rapid inflation.

Warren Buffet declared at the recent Berkshire Hathaway annual meeting that all this quantitative easing has been very clever policy, "but the unwind of it has got to be more difficult than buying."

For fund managers, the question is where to be. In equities the least bad place remains the US. Meanwhile, valuations in real estate look less stretched than in equities and most bonds, according to the article.

See full text of article here:  http://on.ft.com/19dSXph (I learnt after the fact that FT may restrict access to non-subscribers ...)

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Hedge Fund Bears

 as reported in the Financial Times on May 10, 2013

In the week of May 10, 2013, some of the biggest names in the hedge fund world met to share investment tips at the Ira Sohn Conference, a high-profile gathering in New York.

The differences between the fund managers were in their degree of pessimism.

Underlying the various calls was one theme: the effects of emergency action taken by governments and central banks since the global financial crisis erupted five years ago.

Ben Bernanke, chairman of the US Federal Reserve, loomed large as the greatest distorter of markets. His bond-buying programs have boosted prices for government debt, the effects of which, according to the speakers, had trickled into asset markets of all types.

Stanley Druckenmiller, lieutenant to George Soros and head of Duquesne Capital Management and without a losing year in 30 years, opined that the recent retracement in commodities markets was no mere cyclical swing. "The commodity supercycle is over. It is not a correction; it's the beginning of a trend."

Jeffrey Gundlach of Doubline had an ominous warning: "I recommend you take all the money out of any bank account you have."

Pointing to Cyprus - where depositors saw 40-60% of their savings used to pay for a bank bailout - he said such a move was unlikely in the US, but why take the chance? "Many are likely to say Cyprus is just one country, to which I say the Lusitania was just one small boat." [Side note: Lusitania was one of the largest passenger carrying ships of its time. It was a British ship sunk by the Germans in WWI.]

Paul Singer of Elliott Management, notorious for his attempt to impound an Argentine ship amid a battle with Buenos Aires, said, "Everyone wants a safe haven. There is no such thing in today's markets, and that's one of the elements of the distortion."

There was also a consensus that it was foolish to challenge the Fed. Mr. Gundlach said that investors must realize there would be no end to quantitative easing, at least in the near term.

Kyle Bass of Hayman Capital, however, has bet against the Bank of Japan. He sees in its recent actions signs of stress that he has been predicting for three years. "The beginning of the end has begun."

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Japan, On Path to Inflation or Hyperinflation?

On March 21, 2013, the Financial Times featured an article by Scott Minerd, chief investment officer at Guggenheim Partners. 

In that article, he speculated as to what would happen if rising domestic inflation, which Japanese authorities have recently worked into policy, runs amock.

Link to that article which is entitled "Japan risks sliding down slippery slope to hyperinflation". ((I learnt after the fact that FT may restrict access to non-subscribers ...)

If capital were to flee Japan, which is what he suggests, there's always the US where it could flee to -- the ultimate safe haven. The bigger question is the following: If capital were to flee the US, where would it flee to?

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Natural Gas: One Commodity, Three Prices

US natural gas prices are cheap relative to the rest of the world, at about $4 per million British thermal units. In Europe, gas is trading at double this price, while in Japan gas in its liquefied, imported state costs as much as $15.

With world prices so disparate, trading houses are positioning themselves to export liquefied natural gas from the US should the US government open up the export market.

The reason for inexpensive prices in the US is the shale gas revolution. Last year in spring, US natural gas prices hit a 10 year low of around $2.

The larger context. What is happening to other commodity prices?

Corn is down 21% from its peak price of $8.43 per bushel on Aug. 10, 2012.

Gold is down 27% from its peak price of $1,920.30 per troy ounce on Sep. 6, 2011.

Copper is down 31% from its peak price of $10,190.00 per tonne on Feb. 15, 2011.

Brent oil is down 34% from its peak price of $147.50 per barrel on July 11, 2008.

Looking forward. What can we say about future inflation?

If history were to repeat itself, we could see 80% inflation at the CPI level in the next 5 years, according to the chart on page 10 of the following report and the discussion surrounding it. 

http://www.sitkapacific.com/files/Sitka_Pacific_Capital_Management_2013_Annual_Letter.pdf

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Gold Price: Unprecedented Move in 30 Years

Last week, gold suffered its biggest one day drop in percentage terms for 30 years on Monday, April 15.  It touched a two-year low of $1,321 per ounce during the following session (i.e. on Tuesday, April 16).

By the end of the week, gold regained the $1,400 mark, but was still down about $100 over the week.

What does this mean? 

I will venture to guess that we will see further price declines in gold. Alongside of this, we will see further strengthening of the US dollar as a safe haven currency. Furthermore, the decline in the gold price may be the harbinger of substantial drops in US equity markets ...


Updated on June 21, 2013.

Yesterday, gold fell more than 4% to a 2.5-year low of $1285.90 per ounce. (The April 15 drop which was reported above had been under 9%.)

Yesterday's drop occurred one day after the US Federal Reserve signaled a scaling back of its monetary stimulus program, on which day gold also dropped.

Joni Teves, UBS precious metals analyst, provided the following explanation for the price slide: slowing Fed asset purchases with the end now potentially in site, higher yields, a stronger dollar and continued improvements in the economy, coupled with an already very weak investor sentiment.

UBS, a leading bullion bank, lowered its one-month target to $1,250 from $1,425 and its three-month forecast to $1,350 from $1,500.

As reported in the Financial Times on June 21, 2013 on page 20.

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Global Oil Market Size by Type of Use

The size of the global oil market based on consumption demand was 87 Mn b/d (million barrels/day) in 2010, according to Opec and as published in the Financial Times on April 2, 2013, p. 9.

The high-level breakdown across types of use was as follows:

46 Mn b/d Transportation (53%)

23 Mn b/d Industrial activity (26%)

14 Mn b/d Power & heat generation (16%)

The low-level breakdown was as follows:

Transportation

22 Mn b/d cars (25%)

13 Mn b/d trucks (15%)

5 Mn b/d aircraft (6%)

4 Mn b/d ships (5%)

2 Mn b/d railways (2%)

Industrial activity

9 Mn b/d petrochemical activity (10%)

14 n b/d other industrial activity (16%)

Power & heat generation

5 Mn b/d power generation (6%)

9 Mn b/d heat generation (10%)

4 Mn b/d other uses (5%)

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Is the US Stock Market Peaking?

EPFR, the data provider, recorded inflows of $3.175 Bn into US dividend-focused equity funds in the week to February 13, 2013, more than in any week since it began tracking the figures in 2002. The previous record was $3.172 Bn in 2008.

The above is an excerpt from an article that appeared on page 20 of the Financial Times on Tuesday, March 19, 2013.

See full article here: http://on.ft.com/11FJMiR (I learnt after the fact that FT may restrict access to non-subscribers ...)

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