Good interview on Bloomberg today – follow this link, since Bloomberg has disabled embedding.
Good interview on Bloomberg today – follow this link, since Bloomberg has disabled embedding.
Glancing around at the commodity and global stock markets, it looks like the bounce from last month’s lows has been adequate to reset psychology for another decline. This is not to say things have to drop this week, but if prices fail to push higher gravity could take over, as the general climate appears to be shifting back to de-risking and deflating (credit downgrades, budget cuts, poor housing sales, lack of hiring, treasury bond strength, etc).
China is the perfect proxy for risk appetite, as it had the biggest stock bubble and action there is linked to gobal consumer demand and industrial commodity prices. Here’s a long-term view of FXI, the ETF of largecap Hong Kong-listed Chinese shares. The big bounce ran out of steam last October, after which prices have made a series of lower lows and lower highs, the definition of a downtrend. Daily RSI and MACD suggest that short-term upside momentum may be stalling:
Taking a look at a 4-hour chart of SPX futures (ES), I wouldn’t necessarily expect stocks to keep dropping this week. In fact, it would be somewhat clearer if we got one of those rollercoaster topping patterns over the coming days, where stocks rally and fall by 2-3% for a few times to bleed off the momentum, such as they have done at the last three intermediate-term tops in October, January and April.
If SPX sticks to that topping pattern, it could fill the box I’ve drawn below on the daily chart, meaning another try or two at 1130:
Commodities did spectacularly well from winter 08-09 to winter 09-10. Many tripled in price, such as oil, copper and palladium. The world seemed convinced that another great phase of inflation was underway or would start real soon now.
The reality is that demand is anemic and that there has been little or no economic growth. The only exceptions are property bubbles in China, Australia and Canada that are just running on fumes, where America’s was circa 2006. The commodity bounce was purely a technical reaction from an extremely oversold condition, exacerbated by mistaken faith in Keynesian policies deployed worldwide. The rally began to stall out from mid-autumn to this March, and is now starting to roll over in force.
Here’s a 3-year chart of copper, a very liquid and widely followed market. Many believe it is an economic guage, but this is nonsense IMO, since it was trading well under a dollar as the economy was booming a decade ago, and like a lot of other commodities was very expensive in the stagnant 1970s (and right now of course). Prices are driven first and foremost by fads. Why else would you expect it to trade at $3.50 in the middle of a deflantionary depression when stockpiles are huge?
I don’t like to brag, since I get plenty of timing wrong, but back in April I noted the divergence in RSI and MACD right as copper made its top around $3.60.
Another favorite guage of risk appetite is the silver:gold ratio, which has remained stalled for the better part of a year now, and looks set to decline again:
Also check out the palladium:gold ratio, since palladium experienced a major speculative bubble lately which has started to crash very hard:
Here’s oil, West Texas Intermediate… in all of these commodity charts, note the severity and unrelenting nature of the last drop in 2008. There were few rallies where one could safely get on board for a short sale — you were either short from the top for the ride of your life or just had to watch.
I’m not expecting a lot of chop in these markets. I’d love a nice rally here to increase short positions, but it’s not the nature of commodities to take their time on the way down. Traders had months to see this trade coming and set up shorts, but for those who don’t over-leverage themselves it is by no means too late to get on board.
By the way, the commodity currencies (Australian, New Zealand, Canadian dollars, Brazilian Real and South African Rand) have also started to fall hard but have a long way to go to correct their rallies from last winter.
Want to see one commodity market that we’re definitely not too late to short? Gold and silver mining stocks (GDX ETF below). The gold bugs have been extremely confident and their ranks have swelled lately, so a deep set-back is much needed in this sector. After all, mining stocks often have a greater correlation with the S&P 500 than with the gold price (which I expect to fall, though not as much as stocks).
Ironically, I’m part of a group that’s building a huge database and stock screener in this space, called the Mining Almanac. Launching our beta site right at the top of a commodities bubble couldn’t be worse timing, so I’m trying to make lemonade and using it to search not for value stocks (what I designed it for) but the opposite so that I can short them!
For safety, don’t buy gold stocks, which are a financial asset with value contingent upon stock market conditions, tax laws (seen in Australia lately as their leftist government has slapped an extra tax on the mining industry) and myriad operational concerns. Along with plenty of cash and treasury notes, buy gold itself, either stored in your name in a vault oversees or in your personal posession. Gold is money, and in a deflationary depression with undertones of currency crisis, you want the very best.
I happen to have similar positions at the moment, though unlike Rogers, I’m a bear on commodities and China, which he seems to be perpetually long. Here’s today’s Bloomberg interview.
- Long euro as a contrary position. Too many shorts out there.
- All these countries (Spain, Portugal, UK, US) are spending money they don’t have and it will continue.
- ECB buying government and private debt is wrong.
- EU is ignoring its own rules about bailouts from Maastricht Treaty.
- Governments are still trying to solve a problem of too much debt with more debt.
- Fundamentals are bad for all paper currencies. Good for gold.
- Is “contagion” limited now? Well, for those who get the money…
Here’s a longer interview from a few days ago on the same topics as well as stocks:
- Rogers has a few stock shorts: emerging market index, NASDAQ stocks, and a large international financial institution.
- Rogers owns both silver and gold, but is not buying any more. He’s not buying anything here, “just watching.”
- Optimistic about Chinese currency. Expected it to rise more and faster, but still bullish.
- Thinking of adding shorts in next week or two if markets rally (my note: they have now).
- “Debts are so staggering, we’re all going to get hit with the problem,” no longer just our children and grandchildren.
Thanks to Pej for finding this:
Chanos relays a great quote from Milton Friedman: He was brought to watch the Chinese built a canal, and when he asked why they were using shovels and not bulldozers, he was told that machinery was being eschewed in order to create more jobs. Friedman replied with something like, “Oh, I thought you were building a canal. If it’s jobs you want, why don’t you give them spoons?”
Like the Chicago school that he founded, Friedman was great on most issues except for money. He couldn’t come to terms with the idea that the very existence of a central bank and legal tender laws create insurmountable moral hazard and will always lead to bubbles.
Ok, so how big is China’s commercial real estate bubble? Under construction right now, there are 25 square feet of office space for every person in China.
Family savings are being invested as down-payments for investments in highly-speculative developments. The bust will take care of a lot of the middle class’s much-touted savings.
According to Bloomberg, the big bears are circling China.
Marc Faber, publisher of the Gloom, Boom & Doom Report, says China is overdoing it. “It does not make sense for China to build more empty buildings and add to capacities in industries where you already have overcapacity,” Faber told Bloomberg Television on Feb. 11. “I think the Chinese economy will decelerate very substantially in 2010 and could even crash.”…
…The costs of wasteful investments in empty offices and shopping malls and in underutilized infrastructure will weigh on China, Chanos, president of New York-based Kynikos Associates Ltd., said in a speech at the London School of Economics. “We may find that that’s what pops the Chinese bubble sooner rather than later.”…
Risk for Commodities
Last month, banks lent a further 1.39 trillion yuan — almost one-fifth of the target amount for the whole of 2010. Also in January, foreign direct investment climbed 7.8 percent to $8.13 billion. Retail sales during last week’s Lunar New Year holiday rose 17.2 percent from the same period in 2009, according to the Ministry of Commerce.
While China’s resilience has helped support the world economy, raising demand for energy and raw materials, the bursting of a bubble would have the opposite effect. Government efforts to wean the economy off its extraordinary support may roil markets.
In January, the central government ordered banks to curb lending, which put China’s stock market into reverse. In a sign, in part, of how dependent the world has become on China, stocks and currencies slumped in places such as Australia and Brazil that supply commodities to the People’s Republic. On Feb. 12, the eve of the one-week Lunar New Year holiday, China for the second time in a month ordered banks to set aside more deposits as reserves. The Shanghai Composite Index has fallen 8 percent year-to-date, after gaining 80 percent in 2009.
Bidding Up Prices
“If the Chinese economy decelerates or crashes, what you have is a disastrous environment for industrial commodities,” said Faber, who oversees $300 million at Hong Kong-based Marc Faber Ltd.
The stimulus tap that Beijing turned on has flowed to projects such as its 2 trillion yuan high-speed-rail network. The 221 billion yuan Beijing-Shanghai line has surpassed the Three Gorges Dam as the single most expensive engineering project in Chinese history.
Some beneficiaries of the government efforts have plowed their loans into real estate and stocks. Property prices across 70 cities jumped 9.5 percent in January from a year earlier, according to government data.
…Chanos, a short-seller who was early to warn about Enron Corp., is one of a growing number of investors sounding the alarm. “Right now, the Chinese market is overheating,” George Soros said in a Jan. 28 interview.
Wait, I thought Soros was a Keynesian. Isn’t printing and spending the way to perpetual prosperity?
Another example Chanos has cited is the city of Ordos, where party officials have built an entire new downtown on the windswept grasslands of Inner Mongolia, 25 kilometers (15 miles) outside the existing municipality of 1.5 million people.
Ordos is really comedic. Check out this video:
5-year view of the ASX 200:
Australia has a huge property bubble that has yet to burst. The average home there, at AU$502,492, is priced at eight times average household income, compared to about three times income at the height of the US bubble (though higher in places like California and Florida). This is a country with a population density of just 7.3 per square mile, compared to 83 for the US!
Aussies are still in the denial stage, which says a lot about the nature of group-think, since they can look at the rest of the world and see the exact same dynamic at play, though a couple of years ahead.
China appears to be in about the same place, with prices even more out of whack with incomes and rents, twice as overvalued as the most overvalued California houses in some cases. Australia and China also have plenty of froth in their equity markets, though those resemble the US and the rest of the world.
What would happen to Australia if housing prices, stock prices and commodity prices all collapsed at once? Come to think of it, Canada is in a very similar position, and their housing bubble, while not as wild, has still yet to deflate.
Let’s start with the Wall Street line, courtesy of Bloomberg this week:
Demand will be strong next year as consumption gains in China, the world’s biggest metal user, said Andrew Karsh, a co- manager of funds for the Credit Suisse Total Commodity Return Strategy team, which oversees about $4.4 billion.
“Industrial metals are a favorite of ours,” Karsh said yesterday in a telephone interview from New York. “There is real demand growing from emerging markets. Copper, lead, aluminum and other metals are required to increase infrastructure in places like China and India.”
This trader isn’t buying it, and as we’ll see below, China’s got more of the red metal than it knows what to do with.
From kitcometals.com, here is a 5-year chart of copper warehouse stocks:
Sure looks like someone took delivery of over a quarter million tonnes of London copper this spring and summer. Unfortunately for the bulls, it just went from warehouses on the Thames to warehouses on the Yangtse, and now it’s looking for a new home!
Copper stockpiles held in duty-free warehouses in China, the top user, may be re-exported after surging to as much as 350,000 tons from almost none at the start of the year, according to Xi’an Maike Metal International Group.
“We can hardly find buyers for refined copper,” said Luo Shengzhang, general manager of the copper department at Xi’an Maike. The company ranks among the country’s three biggest importers, according to the executive. “China’s got to export some copper from now and next year,” Luo said in an interview.
Copper, used to make pipes and wires, has more than doubled this year as China’s 4-trillion-yuan ($586 billion) stimulus spending, increased State stockpiling and lack of scrap material boosted China’s imports to a record. That’s helped to drive Chinese prices below London’s since at least July.
Xi’an Maike has had to re-route some bonded copper to London Metal Exchange warehouses in South Korea because the company was unable to find buyers in China, with local supply outpacing demand, said Luo. The effect of the stimulus package was wearing off and local scrap supply was improving, he said.
And this from Mineweb.com:
Some of the more telling lines from a translated script of the CCTV (China’s national news channel) program (which I assume to be accurate) include:
- Wang Chao lived in Anxin county of Hebei province (rural area). He is in charge of a metal scrap collecting company. He used to purely take commissions for collecting scrap. Since 1H 2009, he started stocking scraps. He told CCTV his business now is like ‘gambling.’ Not only him, Mr. Wang said many people in his town have stocked a lot of metal at their home.
- They told CCTV they believe the metal prices will ‘certainly rise’, and they have ‘a lot of’ stocks. For example, he said, in Laohetou county, every household has dozens to hundred tonnes of copper. Nobody wants to sell. They believe copper price will goes back to Rmb70,000/tonne from currently Rmb40,000/tonne.
- Traders in Wenzhou city of Zhejiang province: A business man told CCTV, they use a lot of bank loans and bought a lot of metals for stocking. For one warehouse, he stocked at least 15 Kt to 20 Kt of copper. For his total personal metal inventories, he invested Rmb1-2 bn. He believe all metal prices will surge with inflation.
- A non-ferrous metal warehouse manager, Mr Qin Baoqing in Wusong District of Shanghai. He said many metals cannot be put in their warehouse, so they have to leave them in the backyard. Many stocks have not been moved for 3 months now. For example, he said, they have many aluminium stocks from Lanzhou Aluminium, Guizhou Aluminium, etc.
- He Jinbi from Maike (metal trading company). He told CCTV they saw many farmers in Guangdong province stocking more than 100 tonnes of aluminium at home. These people used to raise geese for living.
- Because the interest rate is too low in China. Many farmers could make hundreds of RMB profits per tonne, with dozens of Rmb per tonne cost of interests. They use their existing inventories to borrow more from banks. Banks are very ‘happy’ to lend to them.
Hendry is the founder of Eclectica Asset Management.
“Who is going to pay the debt that that building is resting on? …A building with no tennants. Half a billion dollars of someone else’s liabilities.”
“…very expensive, empty building where the developer went bust.”
“I haven’t seen any sign of a manufacturing base anywhere close to here.”
ABSTRACT—Until recently, it was widely held that happiness fluctuates around set points, so that neither individuals nor societies can lastingly increase their happiness. Even though recent research showed that some individuals move enduringly above or below their set points, this does not refute the idea that the happiness levels of entire societies remain fixed. Our article, however, challenges this idea: Data from representative national surveys carried out from 1981 to 2007 show that happiness rose in 45 of the 52 countries for which substantial time-series data were available. Regression analyses suggest that that the extent to which a society allows free choice has a major impact on happiness. Since 1981, economic development, democratization, and increasing acceptance of diversity have increased the extent to which people perceive that they have free choice, which in turn has led to higher levels of happiness around the world, as the human development model suggests.
Ok, makes sense so far.
But the strongest support for the claim (my note: which the authors challenge) that the happiness levels of countries have not risen over time comes from the United States, which provides by far the longest and most detailed time-series data on SWB. Hundreds of surveys have measured happiness and life satisfaction among the American public in almost every year since 1946. No other country has a comparable database, and the US data show a flat trend from 1946 to the present.
This finding was very surprising to me, since I would have thought that the degradation of community and family and the steady creep of totalitarianism and tabloid society would have had a negative effect on happiness in the US. I would have expected happiness to decrease over the last 60 years even as material wealth has increased, since earlier studies have shown a decoupling of happiness with wealth after a basic comfort level is reached (at about $10,000 per capita). As the authors explain their thesis:
This societal-level shift is linked with individual-level value changes, from giving top priority to economic and physical security toward giving top priority to self-expression values that emphasize participation, freedom of expression, and quality of life… The underlying theme of this shift in life strategies is to deemphasize external authority and maximize individual autonomy.
That’s certainly where this individual’s priorities lie, and why he has chosen a life outside of the US. My own conclusion from reading this study is that its methodology for measuring happiness must be flawed, since it relies heavily on asking people versions of the question, “how happy are you?” It seems to me that various societies may have typical responses to the question that do not reflect their actual well-being. Maybe it just is never acceptable for a Japanese to wax on about how great his life is, while it is perfectly normal for a Mexican to do so.
Maybe people don’t really know how happy they are as a society if they don’t have perspective across time and geography, something that very few possess (as evidenced by such phenomena as the success of propaganda or occurrence of financial bubbles). I also suspect that this little study of studies was commissioned and promoted as part of the west’s campaign to spread “freedom and democracy” at the point of a gun.
It’s release is particularly timely in light of the new tensions in Eastern Europe, since it shows that the strongest shift towards happiness in the last 30 years occurred in that region (hint: evil Russia wants to repress its poor neighbors again, and the USA must help them preserve their newfound happiness). Also notable is that China’s happiness has decreased according to the survey, since of course we are to believe that despite outward material success, those smiles at the Olympics are just for show, ordered up by the Party leaders.
At any rate, here is the chart the authors provide, from the World Values Survey. Draw your own conclusions.
Click on image for sharper view.