Infographics: The History of Metals

From Visual Capitalist (hat zero hedge)

Courtesy of: Visual Capitalist

Blazing Start for 2013: Phisix 6,000!

I have already made my case for 2013 last week. 

To summarize, ultimately the direction of interest rates will likely drive the direction of the Phisix where higher rates may put a lid on the gains of the Phisix while continued low rates may inspire a blowoff phase.

Yet the direction of local interest rates in 2013 will not be limited to domestic events as they will most likely be influenced by the external environment and by the collaborative efforts by central banks

I also believe that low interest rates will persist, at least until the first quarter. This means that the momentum from the yearend rally will likely be carried over the same period, but of course subject to sporadic profit taking.

As I previously noted[1],

This week’s fiery opening has essentially signified a carryover from last year’s final quarter blitzkrieg (right window), a thrust which may last until the first quarter..

Global equity markets have remained buoyant, even if many major emerging markets, such as the BRICs and ASEAN have begun to manifest signs of profit-taking (this week). The chart above, shows of the weekly performance via the blue bars and the year-to-date or two week performance through the red bars.

Obviously given the trailblazing start, the huge two week gains and signs of overextended run, a short profit taking phase should be a natural consequence…unless we have already reached a blowoff phase.

Mining Index: Head Fake or Dominant Theme for 2013?

I also noted that 2013 will be dominated by the mines

Again from last week

for as long as the inflationary boom remains, I also expect a rotation towards last year’s laggards: the mining sector and possibly the service industry.

I’d like to refresh a perspective which I have been pounding on the table since the latter half of 2012.

The idea is that the mining index (blue) has been in alternating leadership with the Phisix (red) for the past 6 years or since 2007. The mines had two successive year of gains in 2006-2007

Of course, this hasn’t just been about patterns. This has been about the relative price effects of money creation and credit expansion or the Cantillon Effects applied to the stock markets.

The narrow breadth of the Philippine stock market, where only 344 companies are listed according to Wikipedia.org[2], amplifies the effects of the inflationary boom via rotational patterns.

Specifically, industries which recently outperformed eventually encounters a year-long reprieve and industries that have underperformed become the next market darlings. The eventual result: the rising tide lifts all boats or that price levels of publicly listed securities generally increase overtime, but again the relative difference lies in the degree of increases and the timing.

For the past 2 weeks the local Mining index bannered the Phisix (blue-weekly gains) to fresh record highs (8.78% gains in 2 weeks).

The holding industry, one of last year’s best performers, remains resilient and has managed to grab the second spot. Nonetheless another 2012 tailender, the service sector, has narrowed the lead of the Holding industry, and placed third.

Remember, the two former laggards were last year’s politically persecuted industries: The mining industry, particularly, for environmental issues (tailing spills, EO 79) and taxes (excise taxes), while the telecoms (as the industry’s heavyweights) had also been pressured for higher taxes (through the proposed SMS Tax). Telecoms account for about 64% of the service industry index.

The markets may have begun to discount the posturing for political uprightness by Philippine authorities through sustained media assault on these industries, perhaps due to the coming national elections in May

The market could be also be saying that a political comprise or accommodation may be in the pipeline for the contending parties, or that the sheer inundation of money in the system, has been enough to negate or benumb the markets to the political risks involving these industries.

Aside from the potential political accommodation, mainstream media’s take on the mining industry will likely be predicated on the return of foreign investments and of a ‘recovery’ of ‘demand’ via global economic statistical growth.

Here, I am predicting how mainstream media and their preferred ‘experts’ will depict on the mining resurgence, if sustained. These are the likely narratives that will be used. 

To validate the assumption of the supposed recovery of global growth, mainly from emerging markets, we need to see a broad based rise in prices of metals and other commodities. Also industrial metals should outperform gold and or the precious metals group.

The recent the global asset boom may have partially created such impression as industrial metals (GYX) have now outclassed gold.

But of course, this has been more about the mirage from the tsunami of money unleashed by global central banks, and likewise, the domestic counterpart.

For me, given the absence of an active and liquid physical metals spot or futures commodity markets in the Philippines, the mines signifies as the best alternative or hedge against the growing risks of price inflation or even stagflation.

Furthermore, despite the seeming underperformance of the price of gold, which I believe has been actively suppressed, this time through the US Federal Reserve communications strategy in portraying the tilting of balance towards the ‘hawks’, the string of record breaking activities as evidenced by record buying of physical gold and silver in the US (first 2 weeks of 2013), record ETF holdings of gold (as of November 2012) and record gold imports of India and China (fourth quarter 2012), aside from milestone third quarter rate of growth in the gold buying of emerging market central banks (third quarter of 2012), suggests of the blatant disconnect between gold prices and real economic activities underpinning the gold markets[3]. Yes some Fed officials have openly been chattering about risks of price inflation!

Gold prices may not immediately rise, or may even fall in the interim—for the simple reason –gold have risen for 12 straight years!!! This simply is regression to the mean or a normal function of the market process.

However if gold’s real economic activities continues with its current record breaking pace, then bullish pressure building underneath today’s politically constrained prices will eventually be vented on the marketplace—once such pressures become powerful enough to force upon a fissure or a valve or an outlet to release them.

And this is what differentiates between value investing marked by “sit and wait” based on fundamentals compared to the ticker tape mentality, which is based on impulse and skewed towards momentum or price chasing punts.

And given the 2013 sturdy recoil from last year’s selloff, like the Phisix, I expect the natural process of profit taking in the mining sector to occur over the interim. And this should serve as an opportunity to enter.

Of course, two weeks may not make a trend. And I could be wrong, where the recent rebound may be all about an oversold bear market bounce or a head fake. But of course, such perspective essentially ignores the real drivers of today’s boom.

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[1] See What to Expect in 2013 January 7, 2013

[2] Wikipedia.org Philippine Stock Exchange

[3] See Is the US Federal Reserve Indirectly Putting Down Gold Prices? January 12, 2013

US and Global Economy: Pieces Of The Jigsaw Puzzles All Falling In Place

``Deflationary credit contraction is, necessarily, severely limited. Whereas credit can expand (barring various economic limits to be discussed below) virtually to infinity, circulating credit can contract only as far down as the total amount of specie in circulation. In short, its maximum possible limit is the eradication of all previous credit expansion.” Murray N. Rothbard

Mainstream expert analyses are mostly hinged on heuristics (mental shortcuts), except that they often argue from the context of technical gobbledygook which appeals and overwhelms the naive public to assume such abstraction as universal reality.

For instance, many go at length to argue that low interest levels in US Treasury exhibit signs of deflation. Heck, as if deflation or falling prices in the mainstream definition means the end of world. Well, falling prices also means greater purchasing power, which from the fundamental standpoint of demand and supply, it means more goods that one can acquire. So the end of the world, it is not.

For us, deflation isn’t a one size fits all dynamic. We see this market force as operating from different previous actions; one that deals with productivity growth or one that deals with government property confiscation, or bank credit contraction or cash building. So the social impact won’t be the same. Yet when the mainstream hears or reads of deflation they seem to develop a reflexive revulsion to the word.

What the mainstream actually refers to is of the credit contraction order- which according to them has a feedback mechanism which forces liquidation, reduces collateral values, curbs aggregate demand, which leads to excess supplies and subsequently falling prices which gets exacerbated by expectations of people to hoard cash and back to the loop.

It’s a story long been told even during the days of my Dad, but this has hardly occurred. Not even with Japan, which the mainstream has arrantly mislabelled[1].

Although deflation had an instance of reality in 2008, our rebuttal has been that in a world central banking, governments have the incentive and the tools to temporarily offset credit contraction by serially blowing up new bubbles. How? By keeping interest rates excessively low and by printing an ocean of money.

Yet mainstream insist that this is a demand problem and that government actions won’t have an impact.

On the contrary we persist to argue that this is mostly a supply dilemma—one where banks have been stuffed with questionable assets and that reluctance to lend is a function of some distrust.

And the disruption from the near seizure in the US banking system, which prompted for a short episode of deflation, as consequence to the Lehman bankruptcy is why the US government put to risk some $23.7 Trillion worth of taxpayer money[2], according to a US official.

In short, US officials have been acting on the current financial quandary predicated on a liquidity issue.

It’s funny how many gawk at the actions of the marketplace only to put meaning into them based on their bias or economic religion.

The mainstream refuses to acknowledge that government are people too and are driven by incentives. They see government in a paradox. On one aspect, they believe government operates like supermen whom would act on every single social problem that emerges. Yet on another aspect, particularly on the financial markets, they treat governments as passive onlookers!

From our perspective, the abnormally low yields in the US treasury markets may not be due to the fear of lending or the lack of demand to borrow, but rather from government intervention.

With the US budget deficit expected to hit $1.56 trillion in 2010[3], what better way to attract cheap private financing and create an environment of marketplace confidence (animal spirits) than by manipulating interest rates down!

Since there have been little signs of inflation in the past, then the US government can simply use its covert dealers to conduct interest rate manipulation operations.

And it may not be limited to stealth actions; it may even be reported.

In three weeks since June 30, the Federal Reserve balance sheet has registered consecutive additions to its US treasury positions by $45 billion, according to the data provided by the Federal Reserve Bank of Cleveland[4].

This seems consistent with some signs of unease from select Federal Reserve officials, such as James Bullard, president of the Federal Reserve Bank of St. Louis, who called for renewed buying of treasury securities or the resumption of quantitative easing[5].

Yet these guys seem to be looking at the wrong picture.

First of all, the banking system doesn’t represent the entire US capital markets.

Figure 4: St. Louis Fed: Consumer and Bank Credit at ALL Commercial Banks

But even if we deal with the banking system we are seeing not widespread signs of contraction but signs of credit expansion (see figure 4)!

True business and industrial loans are still down, but nominal lending in US dollars by consumers at all commercial banks have recently skyrocketed (upper window). And we seem to be seeing material improvement in credit activities of bank credit of all commercial banks, perhaps directed at consumers.

Figure 5: Yardeni.com[6]: Flow of Funds

We predicted[7] that the influence of the yield curve lags by about 2-3 year period, which if we are right we could see an acceleration in the activities in the US credit markets by this yearend, could we be seeing the seeds of this turnaround (see figure 5)? Oops....

Now as we earlier said, banks aren’t the sole source of funding for the US economy, which the mainstream loves to fixate on. And I think signs have saying they’re dead wrong.

Why? Because the corporate bond market is likewise booming!

This from Businessweek/Bloomberg[8],

``U.S. corporate bond sales soared 31 percent to $85.7 billion this month, the busiest July on record, as yields fell to the lowest in more than six years on growing investor confidence in the economic recovery. The London interbank offered rate, or Libor, which banks say they can borrow at for three months in dollars, fell the most today in almost 11 months, dropping to the least since May 14.”

And the boom in the bond markets aren’t restricted to the US markets but around the world!

According to the Wall Street Journal[9], (bold emphasis mine)

``The global corporate-bond boom is gathering steam as companies rush to take advantage of some of the lowest borrowing costs in history....

``This month has been the busiest July on record for sales by U.S. companies with junk-credit ratings. Asia's debt market is on pace for a record year, and European companies are also raising money apace.

``The low borrowing costs are the culmination of an unprecedented bond-market rally that began in the depths of the credit crisis in late 2008 and early 2009 and has defied every prediction that it would soon run out of steam. But individual and professional investors continue to plow money into the bond market, giving companies a constant source of funds to tap.”

Defied every prediction? Not for us, as we have been predicting this all along!

And in terms of bank lending guess where the gist of the activities has been? (see figure 6)

Figure 6: Yardeni.com Lending by International Banks

If you guessed the Emerging Markets and Asia, then you are absolutely correct!

Now if we examine the contribution of economic growth in the US by sector, the mainstream seems caught somewhat surprised. Growth expectations didn’t come from the sectors they’d expected them to be (see figure 7).

Figure 7: Northern Trust: Sectoral Contribution To Growth Rates

According to Asha Banglore of Northern Trust[10], (bold highlights mine)

``In the second quarter of 2010, equipment and software spending (+1.36%) made the largest positive contribution to real GDP, followed by exports (1.22%), consumer spending (1.15%), inventories (1.1%), and residential investment expenditures (0.6%).

``In terms of growth rates, equipment and software spending posted a hefty increase of 21.9% after an upwardly revised 20.4% gain in the first quarter. Consumer spending moved up 1.6% in the second quarter after a downwardly revised 1.9% gain in the first quarter.

So technology and the world economy appear to be heavy lifting the growth momentum of the US economy.

As per the technology sector, here is what I wrote last February[11],

``What I am trying to say is that the contribution of the technology sector to the real economy could perhaps be more accurately reflected on the performance of S&P, however, such contribution may have been underrepresented by conventional statistical metrics.”

Not anymore.

For us, the current developments postulates to the following:

-US economic growth dynamics seem to be shifting from the housing to the technology and export sector.

-Investment in the US and the job growth will likely gravitate into these sectors.

-The pattern of growth in the US seem to confirm the boom in the global bond markets and the bank lending patterns of international banks

-Since technology is partly tied to exports, wealth accumulation in emerging markets is likely to fuel increasing demand for tech savvy products

-the global economy should be expected to sustain momentum as globalization deepens, and this will be in stark contrast to the prediction of deglobalization advocated by PIMCO’s Bill Gross.

-Of course, this is another bubble cycle. The next bubble will likely emanate from the emerging markets or the US technology industry[12], or the US treasury. But the risk of bubble implosion would only surface as inflation accelerates and hamstrings government efforts to intervene.

Speaking of which, where inflation is thought to be non-existent, here is a little surprise (see figure 8)...

Figure 8: stockcharts.com: Commodity Laggards

Oops, even the commodity laggards seem to be generating some reanimated activities!

We seem to seeing resurgence in agricultural products (DBA-Powershares DB Multisector Commodity Trust Agricultural Fund), as well as in Natural gas (NATGAS), the Industrial metals (Dow Jones UBS Industrial Metals-DJAIN) and the broad based commodity index (Reuters-CRB).

So far, pieces of the grand jigsaw puzzle seem to be falling in their rightful place, as we have seen it.

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[1] See Japan’s Lost Decade Wasn’t Due To Deflation But Stagnation From Massive Interventionism, July 6, 2010

[2] See $23.7 Trillion Worth Of Bailouts?

[3] CNN Money U.S. deficit streak at 20 months, June 20 2010

[4] Federal Reserve Bank of Cleveland, Credit Easing Policy Tools

[5] New York Times, Fed Member’s Deflation Warning Hints at Policy Shift, July 29, 2010

[6] Yardeni.com: Flow of Funds, July 7, 2010

[7] See Influences Of The Yield Curve On The Equity And Commodity Markets, March 22, 2010

[8] Businessweek, Bloomberg: U.S. 10-Year Swap Negative for Fourth Day as Debt Sales Rise, July 30, 2010

[9] Wall Street Journal, Bonds Soar to Rare Heights, July 29, 2010

[10] Northern Trust, U.S. Economy – Q2 GDP Contained a Few Surprises Although Headline Was Close to Forecast, July 30, 2010

[11] See Statistics Don't Reveal Extent Of The Evolution To The Information Age, February 15, 2010

[12] See ASEAN Markets Surge, Where will The Next Bubble Emerge?, July 11, 2010