Commodities Collapsed Just Before The Last Stock Market Crash – So Guess What Is Happening Right Now? – The Economic Collapse 07-22-15

Salient to Investors:

Michael Snyder writes:

  • Global debt is at record highs, too big to fail banks have never been more reckless, and global financial markets have never been more primed for a collapse. Most people lack the patience to wait for long-term trends to play out so if the stock market is not crashing today, they think that everything must be fine.
  • Commodity prices crashed a few months ahead of the financial crisis of 2008, and we are seeing a repeat. The Bloomberg Commodity Index is down 26% over the past 12 months to a 13-year low. Copper, iron ore, aluminum, zinc, nickel, lead, tin and lumber prices are leading indicators and their falling prices are forecasting a global economic meltdown. The FTSE 350 Mining Index dropped to the lowest since 2009 this week. Gold and copper are near the lowest in at least 5 years, and crude oil is down to $50.
  • The Australian and Canadian dollars are at 6-year lows, and the Brazilian real is at a 10-year low all vs. the US dollar – all commodity resource nation currencies. The Indian rupee is at a 17-year low vs. the US dollar because manufacturing is slowing, and if Americans are not buying, the Indians, Chinese, Vietnamese are not making things.
  • The junk bond market collapsed a few months before the last stock market crash and junk bonds are starting to collapse again.

Andy Pfaff at MitonOptimal calls the commodity bear market a train wreck in slow motion.

Marc Faber at The Gloom, Boom & Doom Report sees a stock market decline of easily 20% to 40% and cites the growing number of companies trading below their 200-day moving average, stock declines leading advances, and the high number of new 12-month lows.

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Correlations Revive as China’s Slowdown Beats Rates – Bloomberg 09-26-14

Salient to Investors:

  • China’s deepening slump is re-establishing the link between currencies and commodities, weakening the Australia dollar, New Zealand kiwi and Canadian loonie on concern their economies will slow and outweigh their relatively high interest rates.
  • Shahab Jalinoos at Credit Suisse said you can only resist gravity for so long as the tango between rates and commodities ultimately gives way to the weak commodity price story as the driver.
  • The Bloomberg Commodity Index at a 5-yr low means there is little to support the Aussie, New Zealand kiwi and Canadian loonie.
  • Luc De La Durantaye at CIBC Asset Mgmt said lower Chinese growth points to a correction in commodity prices and continued correction in commodity currencies and is short the Australian and New Zealand dollars, and increased his bearish bets on the Canadian loonie in July.
  • The median analysts expects China to grow 7.3% in 2014, the slowest pace in over two decades.
  • IEA said oil demand globally is growing at its slowest since 2011, while non-OPEC production is rising by the most since the 1980s.
  • An increase in US interest rates would erode the appeal of Australian and New Zealand assets, which is based on them having the highest benchmark interest rates in the developed world.
  • Steven Englander at Citigroup said commodity prices are more important to the loonie and the kiwi and the move in commodities and slowing US demand – the world’s primary locomotive of commodity purchases – is too big to ignore.
  • Steve Lee at Nuveen Asset Mgmt said the Aussie, the kiwi and the loonie have lost their appeal as they are now more vulnerable.


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Pimco Says External Growth May Lift ‘Not Stellar’ Asia – Bloomberg 12-17-13

Salient to Investors:

Ramin Toloui at Pimco said:

  • Asian growth is stabilizing but not stellar but may receive a boost in 2014 as developed markets accelerate.
  • Asia’s trajectory will continue to be shaped critically by the growth path in the U.S. and Europe
  • China’s growth in the next decade requires a rebalancing of the economy toward household demand, but near term, its performance will be dominated by the dialing back and forth of the credit conditions by policymakers.

Robert Mead at Pimco said limited evidence of any non-mining investment, except in housing, means Australia’s growth outlook is weak, and recently announced cuts in manufacturing will also hurt growth in the next few years. Mead expects the Australian dollar to depreciate further.

Economists forecast 4 of Asia’s 5 largest economies outside Japan are slowing as regional expansion stalls at 6.23 percent for a second year.

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Goldman Says Buy H-Shares Amid Growth: China Overnight – Bloomberg 12-02-13

Salient to Investors:

Noah Weisberger at Goldman Sachs said:

  • The Hang Seng China Enterprises Index will rise 18 percent to 13,600 by the end of 2014, the biggest gain since a rise of 62 percent in 2009, on prospects the economy will stabilize.
  • Commodities will lag the rally in equities.
  • Buying Chinese stocks and selling copper futures may generate a combined return of 25 percent next year.  Stability in China’s growth is insufficient to lift demand for copper as a supply glut weighs on the market as economic growth is driven by the developed market.
  • Equities are Goldman’s favorite asset class in an environment where growth is moderate but not overheating, while policy makers remain accommodating.

The median economist predicts China’s GDP to grow 7.5 percent in 2014.

The Hang Seng China Enterprises Index is at 19 percent below its average valuation of the last 5 years.

Allan Conway at Schroder Investment Mgmt has been positive for China for some time and is overweight Chinese stocks with 22 percent of his portfolio.

Goldman recommends buying S&P 500 futures while selling the Australian dollar; betting European interest rate swaps will decline while 5-year Treasury yields will rise; and selling the Canadian dollar.

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Race to Bottom Resumes as Central Bankers Ease Anew: Currencies – Bloomberg 11-11-13

Salient to Investors:

Axel Merk at Merk Investments said it is a very real concern of countries to keep their currencies weak, and Draghi has persistently been trying to talk down the euro since earlier this year.

Neil Mellor at Bank of New York Mellon sees a new era of currency wars, and sees a change in tone from South Korea, Australia and New Zealand.

Alan Ruskin at Deutsche Bank cites some economies that are generally weak and whose inflation is already low, and said Japan was in that mix for over 20 years and nobody wants to go there. Ruskin said Draghi is taking the disinflation story very seriously, while the Czech Republic is the same story.

Adam Cole at Royal Bank of Canada said the idea that central banks are setting policies to weaken their currencies has always been overstated: in most cases they are happy to see their currencies fall, but they are not targeting weakness.

Lane Newman at ING said the euro-zone central bank wanted to engage in a currency war because they cut rates knowing it was going to put the euro on the back foot.

The Australian Dollar is 27 percent overvalued versus the US Dollar according to a gauge of purchasing-power parity compiled by OECD.

Analysts predict the Fed will delay tapering until March.

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Pimco Bets on Bonds After Worst Run Since 1994: Australia Credit – Bloomberg 07-28-13

Salient to Investors:

Adam Bowe at Pimco said:

  • Australian bonds are attractive after their worst run of losses since 1994 because the central bank will need to lower interest rates as mining investment drops.
  • Pimco prefers to hold Aussie government bonds and high-quality spread assets like swap in the belief that interest rates will fall. The domestic outlook and the rise in global yields provide attractive valuations for Australian government bonds.
  • Pimco said is fairly cautious on corporate debt given concerns about the economy and is favoring high-quality issuers.
  • We are not at the end of the RBA’s easing cycle as the level of investment in mining will drop resulting in a significantly reduced growth in the sector that won’t be filled by residential construction and commodity exports.
  • The Australian dollar is overpriced on fundamentals and lower interest rates and/or a lower currency is required to help transition the country away from mining-assisted growth.

The median economist predicts growth of 2.5 percent in 2013 and 2.8 percent in 2014. The median forecast calls for the Australian dollar, the world’s 5th most-traded currency, to fall to 90 cents by year-end 2013.

Credit Suisse indexes show that the RBA is the only major central bank expected to substantially ease policy over the next 12 months.

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Did Bernanke Signal Return of Risk-Off Market? – Bloomberg 06-27-13

Salient to Investors:

A. Gary Shilling at A. Gary Shilling & Co. writes:

Short stocks and commodities, go long the dollar and Treasuries – if stocks continue to decline, the safety of Treasuries and investment-grade bonds will outweigh concerns about the end of QE.

World economies are growing slowly at best and hold no interest for equity investors, whose entire focus has been on QE.

Investors are facing two shocks: the end of QE and a hard landing in China.

China’s growth is slowed by huge excess capacity and declining numbers of labor force entrants. Official growth data are vastly overstated. and is closer to the 5 percent to 6 percent hard-landing level. China’s total domestic credit from banks et al was 207 percent of GDP in 2012 versus 145 percent in 2008, with much of the increase coming from shadow banking. Short-term interest rates rose to 25 percent last week.

Ultralow interest rates have pushed investors into the highest-yielding assets they could find, regardless of risk, including junk bonds, leveraged loans that finance private-equity buyouts, developing country bonds, investor-owned single-family rentals, and high-dividend stocks such as utilities and consumer staples.

Investors are dumping emerging-market assets and junk bonds. High dividend stocks which outperformed in Q1 underperformed in the recent sell-off. Pension funds have moved into private equity, developing-country stocks and bonds, hedge funds and even commodities.

The average closed-end bond fund has fallen 10.7 percent in the past month versus a 3.4 percent decline in open-end bond funds.

Developed country stocks have much further to drop. The sluggish US economic recovery has produced minimal sales volume growth and no increased pricing power as inflation rates fell to zero, resulting in companies cutting costs, pushing corporate profits’ share of national income to an all-time high.

Robert Shiller’s cyclically adjusted P/E indicates the S&P 500 is 30 percent above its long-term trend.

Slower Chinese growth in manufacturing undermines the rationale for the commodity bubble of the early 2000s. Higher interest rates are eliminating the incentive to store crude oil for sale in the futures market at higher prices.

Gold buyers who thought QE would promote instant hyperinflation are finding instead inflation rates dropping to zero and higher interest carrying costs.

The dollar should continue to gain as a haven, especially as protection from the euro. The strong dollar makes many commodities more expensive for businesses that operate in weakening currencies.

The yen will continue to drop against the dollar as Abe tries to turn deflation into 2 percent annual inflation and force the BoJ to double its purchases of securities.

Commodity currencies such as the Australian dollar, the Brazilian real and the Russian ruble remain vulnerable as exports and prices continue to fall.

Currency devaluations in Japan and elsewhere will be matched by competitive devaluations worldwide. No country wins in competitive devaluations as foreign trade is disrupted. In the end, most will end up devaluing against the US dollar.

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