Central Banks Have Shot Their Wad – Why The Casino Is In For A Rude Awakening, Part I – David Stockman’s Contra Corner 07-25-15

Salient to Investors:

David Stockman writes:

The central banks have shot their wad after increasing their aggregate balance sheet from $3 trillion to $22 trillion over the last 15 years, which falsified financial prices.

The coming deflation will bring a plunge in corporate profits and collapsing prices of vastly inflated risk asset classes. The Bloomberg commodity index will fall below the 100 index level as the cycle from asset accumulation and inflation to asset liquidation and deflation continues. The lagged effect of the project completion cycle causes excess capacity to continue to grow, meaning the plunge in commodity and industrial prices and profit margins has only just begun, and will fall for years to come. Production cuts and capacity liquidation in virtually every materials sector is being drastically delayed by the continuing availability of cheap finance, meaning prices and margins will be driven even lower than would otherwise be with excess capacity.

Central banks engineered massive household borrowing and consumption/housing spending in the developed economies which then ignited an export manufacturing boom in China et al which over-taxed the supply of raw materials as the commodity price boom peaked with $150 oil in July 2008. Governments and central banks then battled the plunge in consumer spending and liquidation of bad mortgages, excess inventories and over-stocked labor by triggering a second artificial economic boom in CapEx and infrastructure spending in China and the emerging markets. China’s total debt went from about 150% of its GDP in 2007 to nearly 300% of GDP today.

Central bankers drove interest rates towards zero to try to spur spending by the middle classes, already at peak debt, but instead generated a scramble for yield among money managers and capital outflows of $4-5 trillion into emerging market debt: the resulting tidal wave of capital investment caused a second surge of commodity prices which peaked in 2011-2013. The monetary expansion has left the developed world at peak household debt and the emerging markets drowning in excess capacity to produce commodities and industrial goods.

CapEx by the world’s top 40 miners rose from $18 billion in 2001 to $42 billion by 2008, paused during the financial crisis, and then rose to a peak $130 billion in 2013. New projects then halted, but big projects in the pipeline when commodity prices and profit margins began to roll-over in 2012, are being completed due to the sunk cost syndrome: thus on-line capacity continues to soar despite falling prices.

CapEx on oil and gas rose from $100 billion in 2000 to $400 billion in 2008 and to the peak at $700 billion in 2014. Lifting costs even for shale and tar sands are modest compared to the front-end capital investment so the response of production to plunging prices has been limited and will be substantially prolonged.

Steel capacity has doubled from 1.1 billion tons to over 2.3 billion tons during the past 15 years, far outstripping current demand. Excess capacity could easily reach 35%, or more than the combined steel industry of the US, Europe and Japan.

Thompson Reuters reports global CapEx for manufacturing, transport, construction, process industries and utilities rose from $450 billion in 1991 to $700 billion in 2001, a 4.5% annual rate, and to $2.6 trillion in 2013, a 12% annual rate.

Read the full article at http://davidstockmanscontracorner.com/central-banks-have-shot-their-wad-why-the-casino-is-in-for-a-rude-awakening-part-i/?utm_source=wysija&utm_medium=email&utm_campaign=Mailing+List+Sunday+10+AM

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Investors Head for Exit as Commodities Extend Slump – Bloomberg 09-30-14

Salient to Investors:

  • Investors pulled the most money from US ETPs backed by raw materials since April.
  • US corn and soybean crops are the biggest ever, global stockpiles of nickel are at an all-time high, the US is producing the most oil since 1986, while China is headed for its slowest expansion in two decades.
  • The Bloomberg Commodity Index is set for a fourth straight annual loss, the longest slide since data began in 1991.
  • Societe Generale lowered its price forecasts for more than half of the 43 raw materials it tracks, and recommended shorting gold on rising US interest rates and a rising dollar, target below $1,000 over the medium-term.
  • Citigroup pared its outlook on crude oil, gold, corn and wheat.
  • Goldman Sachs still expects losses in copper and gold.
  • In August, Citigroup forecast the Arabica-coffee crop shortfall may leave a global production deficit lasting into 2016. Citigroup is bullish on palladium, copper, nickel, lead, coking and thermal coal, cocoa and coffee.
  • Deutsche Bank forecast commodities will end 2014 in a positive run with nickel, zinc and lead outperforming.
  • Donald Selkin at National Securities said certain markets are bullish because of supply issues, including cattle, nickel and coffee, while the worst may also be over for the big three – gold, crude oil and grains.
  • Jeffrey Currie at Goldman Sachs expects gold to fall to $1,050 by year-end, copper to fall to $6,200 a metric ton over 12 months due to a major increase in stockpiles.
  • The IEA said global oil demand will weaken because of weaker growth in China and Europe, rising exports from Libya, and booming US output, all outweighing potential output disruptions in Iraq.
  • Economists expect China to grow 7% in 2015, the slowest rate since 1990.
  • Quincy Krosby at Prudential Financial said you need growth in China to support a rally in raw-material prices.

Read the full article at  http://www.bloomberg.com/news/2014-09-29/gluts-spur-investor-exit-signaling-prolonged-price-slumps.html

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Commodities Drop Signals Global Growth Concern: Chart of the Day – Bloomberg 09-22-14

Salient to Investors:

  • The slump in commodity prices to a 5-year low signals investors are cautious about the strength of the global economy. Brent crude touched a 2-year low last week and iron ore at Qingdao is the lowest since 2009.
  • Economists expect China to grow 7.4% in 2014, the weakest since 1990.
  • Daniel Briesemann at Commerzbank sees high pessimism among speculative financial investors on commodities.
  • IEA said oil inventories in developed countries probably expanded in August at twice the usual pace for the time of year Morgan Stanley expects supply to beat demand in aluminum to nickel to iron ore in 2014.

Read the full article at http://www.bloomberg.com/news/2014-09-22/commodities-drop-signals-global-growth-concern-chart-of-the-day.html

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Gold to Coffee Drive Bullish Bets to 17-Month High – Bloomberg 02-25-14

Salient to Investors:

Hedge funds’ net-long positions of 18 US-traded commodities rose 18 percent last week to the highest since September 2012. Investors tripled the net-long position in arabica coffee this month to the most bullish since May 2011

Barclays said weather is the big driver of commodities.

EPFR Global data show commodity funds are headed for the first monthly inflows since September 2013.

Brazil is having its weakest rainy season in decades, just when moisture is needed the most for coffee tree roots to absorb soil nutrients.

Rabobank Intl said yields and quality for arabica beans will be constrained during this season and the next, and prices will be supported by longer-term concern that output will be limited.

Rabobank said soybean production in Brazil and Argentina is still projected to climb 10 percent, even with the dry weather. The USDA said corn and soybean harvests in the US in 2014 will be the biggest ever, meaning an increase in stockpiles before 2015’s harvest.

Dan Cekander at Newedge USA said grain fundamentals themselves do not suggest a bull story – not without a significant Northern Hemisphere problem in 2014.

Goldman Sachs said the S&P GSCI Enhanced Commodity Index will fall 4.3 percent in the next 12 months, agriculture will decline 9 percent, and precious metals will fall 14 percent.

Gold bets climbed 31 percent to the highest since October 29.

David Mazza at State Street Bank & Trust said assets in the SPDR Gold Trust are heading for the first monthly inflow since December 2012.

Cameron Brandt at EPFR Global said commodity funds are heading for their first monthly inflows since September.

Mark Luschini at Janney Montgomery Scott said the decline in prices last year has helped re-establish equilibrium between supply and demand, so better growth should pull industrial commodities higher, though we are not back in the middle of a commodities super cycle yet.

Read the full article at http://www.bloomberg.com/news/2014-02-23/coffee-to-soybean-wagers-climb-on-brazilian-drought.html

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Gold Bearish Outlook Extended as Price Nears $1,200: Commodities – Bloomberg 12-06-13

Salient to Investors:

Investors cut holdings in gold ETPs every month this year, erasing $69.4 billion. Hedge funds et al are the least-bullish since June 2007.

John Paulson told clients last month that he personally would not invest more money in his gold fund. Goldman Sachs forecast prices will drop to $1,110 in 12 months.

Standard Bank said that while gold should be sold into rallies, lower prices make buying the metal more attractive by the day.

BullionVault’s gauge of client buying was at 54 last month, near a 6-month high of 54.3 set in October and the peak of 71.1 in September 2011 when gold reached a record $1,921.15.

Mark O’Byrne at GoldCore said gold looks oversold, and purchases may increase in China ahead of the Lunar New Year festival at the end of January. The World Gold Council said consumer demand in China rose 30 percent in the 12 months through September and is set to overtake India as the world’s biggest user this year.

Gold’s directional-movement indicator shows a bearish trend strengthened over the past month, but its 14-day relative-strength index fell earlier this week to a level suggesting it may be poised to rebound.

Ole Hansen at Saxo Bank said US growth seems to be gathering momentum.

Credit Suisse said the market may be underestimating the probability of a vote to taper this month, and the dollar may have begun a multi-year bull market.

Economists expect US economic growth to accelerate to 2.6 percent in 2014, from 1.7 percent in 2013, helping global expansion to the highest since 2011. Barclays said supply for all six main industrial metals will increase in 2014, resulting in surpluses for copper, nickel and zinc.

Jeremy Baker at Harcourt Investment Consulting said people are still relatively optimistic towards the US economy, while the fundamentals for commodities are actually improving, though concerns linger that there are some supply overhangs in commodities.

Read the full article at http://www.bloomberg.com/news/2013-12-06/gold-bearish-outlook-extended-as-price-nears-1-200-commodities.html

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Investors cut holdings in gold ETPs every month this year, erasing $69.4 billion. Hedge funds et al are the least-bullish since June 2007.

John Paulson told clients last month that he personally would not invest more money in his gold fund. Goldman Sachs forecast prices will drop to $1,110 in 12 months.

Standard Bank said that while gold should be sold into rallies, lower prices make buying the metal more attractive by the day.

BullionVault’s gauge of client buying was at 54 last month, near a 6-month high of 54.3 set in October and the peak of 71.1 in September 2011 when gold reached a record $1,921.15.

Mark O’Byrne at GoldCore said gold looks oversold, and purchases may increase in China ahead of the Lunar New Year festival at the end of January. The World Gold Council said consumer demand in China rose 30 percent in the 12 months through September and is set to overtake India as the world’s biggest user this year.

Gold’s directional-movement indicator shows a bearish trend strengthened over the past month, but its 14-day relative-strength index fell earlier this week to a level suggesting it may be poised to rebound.

Ole Hansen at Saxo Bank said US growth seems to be gathering momentum.

Credit Suisse said the market may be underestimating the probability of a vote to taper this month, and the dollar may have begun a multi-year bull market.

Economists expect US economic growth to accelerate to 2.6 percent in 2014, from 1.7 percent in 2013, helping global expansion to the highest since 2011. Barclays said supply for all six main industrial metals will increase in 2014, resulting in surpluses for copper, nickel and zinc.

Jeremy Baker at Harcourt Investment Consulting said people are still relatively optimistic towards the US economy, while the fundamentals for commodities are actually improving, though concerns linger that there are some supply overhangs in commodities.

Gold Traders Most Bullish Since March as Paulson Cuts – Bloomberg 08-16-13

Salient to Investors:

The World Gold Council data show that consumer buying of gold rose 53 percent in Q2 from a year earlier, almost making up for the record sales of gold ETPs. The Council sees a dampening of demand in the next few months in India due to restrictions on imports, but says 2014 consumption should be higher than last year in India and in China. The Council said countries added 534.6 tons to reserves in 2012, the most since 1964, and may buy 350 tons in 2013, Turkey’s bullion imports in 2013 through July were 80 percent higher than in all of 2012.

John Paulson, the biggest investor in the SPDR Gold Trust, cut his stake by 53 percent  and George Soros and Daniel Loeb sold their entire SPDR stakes in Q2.

Mark O’Byrne at GoldCore said people buying physical gold are more about having a store of wealth in the medium to long-term whereas the ETP liquidations are more the speculative side, and cites robust physical demand as people see gold as good value at these levels.

Goldman Sachs predicts gold will fall to $1,050 by the end of 2014 as central-bank purchases won’t be enough to prevent further declines.

David Burns at Commerzbank said trading in physical gold is good this year, and interest increased as prices fell, while fabricators are buying and private clients are seeing a second opportunity to enter the market.

Adrian Day at Adrian Day Asset Mgmt predicts gold will rise to $1,600 by year-end because investors overreacted to speculation that the Fed will taper and as governments maintain efforts to boost economic growth.

James Bullard at FRB of St. Louis said policy makers should be careful in changing course based solely on economic forecasts.

Short positions gained ninefold since November and reached a record July 9, while hedge funds et al increased net-long positions by 54 percent from a 6-year low set in June.

65 percent of economists expect the Fed to taper in September.

The IMF predicts global growth of 3.8 percent in 2014, versus 3.1 percent in 2013.

Georgette Boele at ABN Amro said the main reason commodities markets have been improving is better data globally and overall improvement in sentiment, and base metals will be relatively OK in an environment where the economy is improving.

Read the full article at  http://www.bloomberg.com/news/2013-08-16/gold-bulls-return-after-slump-forces-paulson-cut-commodities.html

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Oil reserves are declining around the world except USA – Jim Rogers blog 07-02-13

Salient to Investors:

Jim Rogers writes:

  • When there’s massive new supply coming on stream, then we’ll have the end of the commodities bull market.
  • The world has consumed more agriculture products than it has produced for a decade now.
  • We are running out of farmers – average age in America is 58, in Japan is 66.
  • Many industrial metals are priced below the cost of production.
  • Nearly everybody has cut back dramatically on their expansion plans and investment plans.
  • Oil reserves are declining pretty steadily around the world, and it remains to be seen how long the oil boom in the U.S. will continue.

Read the full article at  http://www.jimrogers.info/2013_07_01_archive.html

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Where to Invest While Markets Remain ‘Risk-On’ – Bloomberg 01-30-13

Salient to Investors:

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

Investor zeal for yield and disregard for risk favors the junkiest of the junk.

When the grand disconnect between investor focus on the immense liquidity created by central banks and weak and weakening global economies becomes unsustainable, probably after a significant shock, investors should shift from risk on to risk off.

Treasury bonds will benefit from:

  • slow economic growth at best,
  • Fed determination to reduce long-term interest rates.
  • looming deflation,
  • pension funds and life insurers who want to match long-term liabilities with assets of similar maturity,
  • being the haven from trouble in Europe and elsewhere,
  • China’s attempts to cool its economy and stoke weak exports that may cause a hard landing,
  • huge demand from the Fed and central banks and foreign governments.

Buy Treasuries not for their yield but for their appreciation:

  • The 30-yr Treasury bond yield will fall to 2 percent after the grand disconnect ends – a 30 percent total return in one year on a 30-yr coupon Treasury or 44.9 percent on a zero-coupon bond.
  • The 10-yr Treasury note yield will drop to 1 percent – a 10.4 percent  total return on the coupon bond or 11.2 percent on a 10-yr zero-coupon note.

Municipal bonds may benefit from the further decline in Treasury yields, while investment-grade corporates remain attractive for yield and appreciation. Debt service isn’t a problem since non-financial corporations are flush with cash.

Companies with significant dividends are generating real earnings and real cash flow and almost certainly are managed in a prudent and stable manner.

Consumers, especially when hard-pressed, tend to buy the very best of what they can afford, even if low-priced.

Consumer Staples and Food producers’ equities will remain attractive.

The US dollar will strengthen as foreign nations, notably Japan, competitively devalue.

Health care accounted for 17.9 percent of GDP in 2011, and is growing. Major pharma and biotech stocks are attractive. Many health-care companies pay meaningful dividends.

Medical-office buildings and outpatient facilities demand was forecast last year to expand 19 percent by 2019. Physicians are increasingly moving from small practices to hospital campuses and satellite facilities: 53 percent now work for hospitals. Medical-office building values are much less volatile than those of other commercial and residential real estate, and won’t be afflicted by persistent excess capacity, which hinders new construction, as with residential real estate, malls and office buildings.

Rental apartments will continue to benefit from the separation Americans are beginning to make between their homes and their investments. Empty-nesters will move into rental apartments. Rental demand and rental rates are increasing because of tight lending standards for homebuyers, continuing high unemployment and job risks. REITs containing rental apartments are fully priced, but direct ownership of rental apartments is attractive, with overbuilding still some years off.

Tech will rise in 2013 as companies continue to cut costs and promote productivity – increasing profit through price and volume remains difficult, if not impossible.

Conventional North American energy will benefit from the desire to reduce imports. Buy natural-gas producers, pipelines, oil sands, energy services, oil producers, nuclear energy and shale oil and gas. Avoid ethanol, biofuels, wind, solar, geothermal, electric vehicles and other renewable energy because of their heavy dependence on government subsidies.

Commodities are unattractive: prices have been falling since early 2011, amid slow global growth and mounting inventories, especially in China. Industrial commodity prices will be further depressed in 2013 by continuing global economic weakness and rising inventories.

Read the full article at http://www.bloomberg.com/news/2013-01-30/where-to-invest-while-markets-remain-risk-on-.html

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The Global Economy In 2013: 5 Key Economic Trends? – Seeking Alpha 01-23-13

Salient to Investors:

Shane Brett at AllAboutAlpha writes:

  • The long-term outlook for the US economy is broadly positive with housing stabilized, consumer confidence slowly returning, political instability solved by Obama’s decisive win, and as health spending increases under Obamacare.
  • Cheap domestic energy will continue and the US will seriously expand exploration of shale oil using fracking technology. 2013 will see a relocation of energy intensive industries back to the US, causing trade disputes.
  • The big unknown for the US is the effect of massive Quantitative Easing, and currency volatility is virtually guaranteed.
  • The US has the benefits of being food and potentially energy independent, having a young growing population, and of being the center for economic creativity and new business start-ups.
  • China will ramp up infrastructural spending in 2013 providing a boost to the world economy, boosting copper prices and commodity dependent economies like Canada and South Africa.
  • Chinese companies are starting to bid more aggressively for both US companies and domestic American contracts, which will cause friction over the next few years.
  • The German election in September will completely dominate 2013  in Europe, with little substantive progress being made in ending the Euro Zone Crisis until then.  Merkel has disguised both the true size of the Euro crisis and the price to hold the Euro Zone together from the German electorate.
  • The main economies of Europe will teeter between zero growth and recession in 2013.
  • Global money creation will increase currency volatility, with the US Dollar and Euro weakening significantly in 2013. The Australian Dollar is the most overvalued currency now that country’s commodity export boom is subsiding, domestic economy slowing, and interest rates falling. The Euro will remain volatile.
  • The amount of money creation is unprecedented and its outcome largely unknown – massive currency debasement has always preceded high inflation and economic decline. Inflation will rise in the years ahead – always the intention of the US to devalue in real terms its gigantic national debt.
  • Commodity prices will stop declining in 2013 and the super cycle will resume – excluding oil, commodity prices declined progressively throughout the whole of the twentieth century, but reversed the whole decline during the past decade.
  • The world faces a zinc and phosphorous shortage.  The world population will increase by 140 million people in 2013. Many important countries depend on importing food.
  • The melting of the North Pole ice caps will add new regular shipping routes across the Arctic in 2013, a major economic advantage to Russia, Canada, the US and Scandinavia.

Read the full article at http://seekingalpha.com/article/1126361-the-global-economy-in-2013-5-key-economic-trends?source=email_macro_view&ifp=0

 

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Goldman Bullish With Hedge Funds Amid Citi Warning: Commodities – Bloomberg 12-18-12

Salient to Investors:

EPFR Global said the increase in inflows into commodity funds in 2012 was 92 percent higher than the increase in 2011. The S&P GSCI, of which energy comprises 70 percent, fell 0.9 percent in 2012, the MSCI All-Country World Index  rose 13 percent, the Dollar Index fell 0.9 percent, Treasuries returned 2.3 percent. Barclays says commodity assets under management rose 8.6 percent in the first 10 months of 2012, gold-backed ETP holdings rose 12 percent.

Hedge funds’ reduced bullish bets in Q4 2012, which are 51 percent higher than a year ago. 131 traders, investors and analysts expect precious metals to rise as much as 25 percent in 2013, grains to rise 18 percent, and industrial metals to rise 16 percent, and other commodities at least 9.9 percent.

Edward Morse at Citigroup says price rises in 9 of the past 10 years are creating supply gluts. Citigroup says the super cycle of returns has ended because China is growing more slowly and supply has caught up. Citigroup sees grain and soybean prices being supported in half1 2013 by tight supplies.

Barclays and Rabobank Intl say output will exceed demand next year in 10 commodities.

Goldman Sachs expects gold to peak in 2013 due to rising U.S. growth. Jeffrey Currie at Goldman Sachs says accelerating economic growth in half2 2013 will increase demand, and sees a 7 percent return in commodities over 12 months. Currie says increasing consumption will curb available supply, boost near-term prices relative to longer-dated contracts.

Peter Jankovskis at Oakbrook Investments said the disparity in outlooks is due to uncertainty about the economy and government policies over the next year.

Hussein Allidina and Peter Richardson at Morgan Stanley say demand for energy and grains will be resilient and delayed harvests in South America will limit corn and soybean supplies, while economies will accelerate in half2 2013 if central banks extend stimulus. Morgan Stanley said central-bank stimulus will cause investors to continue to buy gold, which will average $1,853 an ounce in 2013,

Jack Ablin at BMO Private Bank said commodities tend to be victims of their own success – we have unprecedented inventories in industrial metals.

The IMF expects world growth to rise to 3.6 percent in 2013. The median economist expects China to accelerate in Q4.

James Paulsen at Wells Capital Mgmt says there’s a good undertow for commodities, which will trend higher the next few years.

Read the full article at http://www.bloomberg.com/news/2012-12-18/goldman-bullish-with-hedge-funds-amid-citi-warning-commodities.html.

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