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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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.

Read the full article at http://theeconomiccollapseblog.com/archives/commodities-collapsed-just-before-the-last-stock-market-crash-so-guess-what-is-happening-right-now

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Quality Following Quantity in U.S. Hiring With $867 Pay – Bloomberg 07-25-14

Salient to Investors:

Paul Ashworth at Capital Economics said:

  • The 1.3 million private-sector jobs created in half1 2014 paid an average of $867 a week versus $843 per week for the existing 117 million private-sector jobs.
  • Mining, construction and business-services companies – which traditionally pay more than the average – are increasingly hiring.
  • The loss of 17,000 information jobs this year is negative given they tend to pay well above average.
  • Accelerating wage growth may be one of the biggest stories for half2 2014.

Read the full article at http://www.bloomberg.com/news/2014-07-25/quality-following-quantity-in-u-s-hiring-with-867-pay.html

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Miners Chopping $10 Billion Search Bodes Next Price Boom – Bloomberg 01-17-14

Salient to Investors:

Mining companies are extending massive cuts in exploration budgets for a second year, setting up the next price boom as China continues its relentless pursuit of metals and energy. Daniel Sacks at Investec Asset Mgmt said companies are smart by cutting back on exploration as it is a cyclical industry.

Richard Schodde at MinEx Consulting said we struggle to find enough deposits to replenish what we mine as enthusiasm or financial capability to fund exploration is fairly limited. Schodde said the current drop in exploration may create supply shortages because it can take 10 to 12 years to develop a mine from when a deposit is discovered.

Colin Hamilton et al at Macquarie said today’s slower growth rates in mine output increasingly are being priced into metals.

The median analyst expects platinum, aluminum, silver, nickel, zinc, lead and uranium to rise by 2017. The median estimate calls for aluminum to rise 22 percent in 2017 from Q1 2014 and uranium to rise 69 percent.

Markus Bachmann at Craton Capital said the biggest investment cycle in history has not produced enough capacity.

Justin Eve at PricewaterhouseCoopers said mining companies have to balance the still strong demand coming out of Asia, particularly China for iron ore, with decreasing cash flows from lower commodity prices. China is forecast to grow 7.5 percent in 2014 and 7.2 percent in 2015, the fastest in the world.

Citigroup and Goldman Sachs predict the commodities slump will deepen in the next few years.

Tom Price at UBS said those wise to invest in exploration because they have a long-term picture are smart but extraordinarily rare.

Read the full article at http://www.bloomberg.com/news/2014-01-16/miners-chopping-10-billion-search-bodes-next-price-boom.html

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The 2014 Contrarian Investment Tour, From Rupees to Copper – Bloomberg 12-10-13

Salient to Investors:

Lewis Braham writes:

Contrarian funds can be a hedge of sorts, though a potentially volatile one as out-of-favor sectors tend to be cyclical and prone to booms and busts. Shorting is inherently dangerous as markets have been trending higher.

Brian Singer at William Blair Macro Allocation Fund said currencies help diversify portfolios because they behave very differently from stocks and bonds. Singer recently put 19 percent of the fund in the Indian rupee which he says is undervalued by as much as 70 percent and India’s new central bank governor has already taken actions to stabilize it by raising interest rates. Singer uses financial derivatives to earn a 6 percent yield on the equivalent of a bank deposit. Individual investors can buy currency CDs – a 3-month FDIC-insured rupee CD from Everbank yields 7.25 percent. Singer is short the iShares Russell 1000 Growth ETF and long the iShares Russell 1000 Value ETF  and says people believe the US is the only source of growth and stability in the world but will be surprised in 2014 at how volatile growth stocks can be.

Don Hodges at the Hodges Pure Contrarian Fund is betting on coal, iron and copper mining stocks and said a recovery in the sector will begin when the Chinese work off their commodity inventories and begin buying again.

Jason Hsu at Research Affiliates said emerging market stocks are at a tremendous discount to US stocks. Hsu said the Shiller PE ratio for the S&P 500 is 24 versus its 16.5 average, versus 13.5 for emerging markets. Hsu is buying TIPS – TIPS with maturities of more than 20 years are yielding 1.5 percent over inflation, and is betting on a decline in large US stocks as well as on improved prospects for high-yield and emerging market bonds.

The BlackRock Municipal Target Term Trust trades at an 11.5 percent discount to portfolio value and yields 6.73 percent on a tax-free basis.

Rudolph Riad-Younes at RSQ International Equity Fund does not like gold because it trades closer to 20 percent above its cost of production versus 10 percent to 15 percent historically, and that cost will fall in the next 5 years, further driving down gold prices.

Read the full article at http://www.bloomberg.com/news/2013-12-10/the-2014-contrarian-investment-tour-from-rupees-to-copper.html

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Rising Dividends Help 2014 Market Match U.S. – Bloomberg 12-03-13

Salient to Investors:

Robert Gorman at TD Wealth said:

  • The 3-yr period of sharp underperformance for Canada is coming to a close
  • Dividend stocks will continue to rule but resource stocks will do comparatively better after showing signs of bottoming out.
  • The S&P/TSX Composite Index and the S&P 500 will both return 7 percent in 2014 including dividends, as economies in the US, Europe and China grow.
  • Expansion of US P/E multiples, now at 17 times, is unlikely to continue with the prospect of tapering.
  • Diversified miners producing coking coal and base metals are preferred over gold miners.
  • Energy producers with rising production and free cash flow are attractive, and preferred over oil stocks based on the expectation of a rising commodity price.
  • Stocks with a history of increasing dividends are preferred over stocks with high dividends that trade purely on yield, especially in an improving global economy that suggests a rise in bond yields, like utilities and to some degree any large REITs.
  • This will be the first year of synchronous global growth since the credit crisis and with significant favorable impacts throughout.
  • US and Canadian stock performance will converge.
  • The outlook for economic growth remains below-average.

The Canadian stock market is forecast to improve in 2014 to at least match the performance of the US for the first time since 2010, led by companies raising their dividends. The average economist expects 2014 will be the first year since 2011 when Canada, the US, China and Europe all post positive growth.

The average economist expects the global economy to grow 2.8 percent, the Canadian economy to grow at a 2.3 percent annualized rate, and the US economy to grow 2.6 percent in 2014.

Brian Belski at BMO Capital Markets said current US levels suggest it may be more difficult for the market to continue its impressive run without equally impressive earnings growth.

David Madani at Capital Economics said the better-than-forecast 2.7 percent growth in Canada’s Q3 showed continued weakness in exports and “one-off” rebounds in business spending following a flood in Alberta and the end of a labor strike in Quebec.

Ian Nakamoto at MacDougall MacDougall & MacTier, said Canada and other commodities-based markets will stay out of favor with investors until global growth accelerates past 4 percent as equity investors continue to believe commodities will not do much or go down, not up. Nakamoto said countries that consume commodities have been in favor and does not see that changing, and sees no broad-based uplift in Canada.

Read the full article at http://www.bloomberg.com/news/2013-12-03/rising-dividends-help-2014-market-match-u-s-.html

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Decline in mining industry is good buying opportunity – Jim Rogers Blog 09-23-13

Salient to Investors:

Jim Rogers writes:

The significant decline of market value in the mining industry is creating an opportunity, and I will take actions if the value drops to 10 percent of the original value.

Read the full article at  http://blogjimrogers.blogspot.com/2013/09/decline-in-mining-industry-is-good.html

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Gold miners wont shut down easily – Jim Rogers blog 07-12-13

Salient to Investors:

Jim Rogers writes:

Things can stay below the cost of production for years. It takes a long time for people to believe they have to close their mines, which costs money. So any commodity can stay below the cost of production for a while.

Read the full article at  http://www.jimrogers.info/2013/07/gold-miners-wont-shut-down-easily.html

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Special Gold Report for July 8, 2013. Jim Rogers Interview – National Forex 07-07-13

Salient to Investors:

Jim Rogers says:

  • Avoid gold mining stocks because miners face stiff competition, and there are now many easier ways to own gold – coins, ETFs, ETNs, futures.
  • Gold will bottom in 2014 or 2015 because eventually prices below the cost of production will cause tightness in supply and push prices higher, but commodities can stay below the cost of production for years and it takes a long time for people to believe they have to close their mines, which is expensive.
  • All the people saying the commodities super cycle is over never saw the bull market coming.  Bull markets climb a wall of worry and we certainly have a wall of worry and skepticism, which is good. In 1987, 1989, 1990, 1994, 1997, and 1998 stocks collapsed and everybody was convinced their bull market was over – but it was not.
  • There are no major sources of new supply coming on stream. Most commodities don’t have massive new supply yet. Agriculture inventories are the lowest in 40 years because consumption keeps rising faster than production. There is not enough new supply to cause the bull market to end other than a temporary consolidation.
  • Most bull markets have lasted for nearly a couple of decades or more. If economies slow down, Bernanke and his friends are going to print a lot more money – the wrong thing to do but all they know how to do.

Read the full article at http://nationalforex.com/2013/07/07/special-gold-report-for-july-8-2013-jim-rogers-interview/

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Gold Bulls Dominant as Portugal Stokes Debt Concern – Bloomberg 07-05-13

Salient to Investors:

Hedge funds are the least bullish in 6 years and ETP holdings dropped to a 3-year low. The US Mint sold 19 percent fewer ounces of American Eagles in June than in May and 73 percent less than in April. Australia’s Perth Mint said coin and bar sales dropped for a second month in June.

Mark O’Byrne at GoldCore said a gold recovery will be tentative initially but a return of the euro zone debt crisis could spark a more sustainable rally, and many jewelers will to use the recent price falls as an opportunity to stock up.

Standard Bank said rising premiums for gold in China signal strengthening demand. Commerzbank said premiums rose in India, in part because of government import curbs.

Dominic Schnider at UBS said ETP assets may fall another 500 tons.

Goldman Sachs Group says gold will fall to $1,050 by the end of 2014, Credit Suisse predicts $1,150 in 12 months and Danske Bank predicts $1,000 in 3 months.

Mark Cutifani says production cuts will be larger than most investors expect and boost prices.

UBS said investors should reduce their holdings in raw materials and buy equities, rating industrial metals as underweight in part because of slower growth in China. UBS, Citigroup, and Goldman Sachs say the commodities super cycle has ended.

Nicholas Brooks at ETF Securities said many commodities are trading at or below the marginal cost of production. which may not stop prices from falling short-term, but medium-term rising costs will ultimately move prices higher.

Read the full article at  http://www.bloomberg.com/news/2013-07-04/gold-bulls-dominant-as-portugal-stokes-debt-concern-commodities.html

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