Super La Nina is coming
Super El Nino is over. Unfortunately, the rate at which the temperature in the equatorial part of the Pacific Ocean rises, suggests that in 2017 we are going to see another anomaly called La Nina. I will spare the weather details and focus on the consequences for the world it can have. La Nina, if it comes (and the chances are high) will cause turbulences all over the globe.
Some regions are going to be hit harder than others. The extreme droughts could be seen in Mezzo America, Southern USA and Southern part of South America. Australia, Indonesia, Southern Africa and Northern parts of Latin America?/////. The USA should brace for very tough winter and hurricanes in South-Western regions.
In August, Mohnish Pabrai took part in Brown University's Value Investing Speaker Series, answering a series of questions from students. Q3 2021 hedge fund letters, conferences and more One of the topics he covered was the issue of finding cheap equities, a process the value investor has plenty of experience with. Cheap Stocks In the Read More
Comparable alignment of weather conditions and solar activity happened during ‘30s last century. The ecological catastrophe hit 12 states. Droughts were so severe that they were followed by sand storms – something without a precedent.
I am convinced that commodity markets will feel the results of La Nina. The significant rise in prices – especially food prices – is very much possible. Today we see Jim Rogers ETN (RJA) at very low levels. La Nina can change this quickly because many farms could be threatened by the aftermath.
Demand for physical gold rose 6-fold since 2008. Back then it was around 53 million oz per annum. To 2015 it rose up to 300 million ounces and is still growing. Refineries record very low influx of silver scrap. We can imply that after a rally in 2011 the amount of metal available beyond mining industry shrunk. When we will see another climbs it may occur that supply of silver from this source is indeed lower than expected.
Prices of precious metals experienced a rally recently especially due to Brexit and European banking sector problems. Silver, just like gold, is a Giffen good – the demand is rising notwithstanding the growth in price. China is an exception here. Chinese like to buy cheap and now it seems they are researching the market for a local bottom in price (especially in the case of gold, as the trading volume of SGE, dropped 30% y/y). This is a very important factor affecting correction we see now. This correction will be weaker if bad news comes from the economy and banking sector. I want to highlight that more and more investors – also institutional investors – diversify their portfolios by adding precious metals. The top buys are miners’ equity, gold and silver ETFs and physical metal.
Mexican president wants quicker integration of North America
Enrique Pena Nieto – the president of Mexico, pushes for accelerating unification of North American countries. According to Nieto, this move should show the world that return to nationalism is a bad choice and breaking down economic and political barriers is better alternative. In the future, he expects a creation of the American Union. During recent conference Enrique Pena Nieto admired NAFTA establishing a ‘free trade zone’ between Canada, the US and Mexico. Nieto himself advocates more common policy in energy and environment sectors.
The American Union is being built very slowly. Similarly to the case of the EU, it starts with signatures under treaties concerning free movement of goods and eventually evolves into bureaucratised, centralised monster. In my opinion, there is a plan to join both Unions in one entity with an integration of national armies – coordinated today by NATO.
“How long are you planning to live?”
Those words were addressed to Japanese pensioners. Vice minister from the Democratic Party had enough ‘courage’ to say them. A demographic crisis is causing problems in the pensionary system. It can be solved in two ways – either there will be more children or there will be fewer pensioners. It seems that in Japan the latter idea seems to circulate more and more often. Every year the problem becomes worse, especially that the means government is using (printing more money to stimulate the economy) are failing spectacularly.
As for now, politicians try to make seniors spend their savings to increase the velocity of money circulation in the economy. Who knows what direction Japanese government is going to choose next? The number of suicides in Japan is already alarmingly high.
International trade volume is falling
During last year we saw a significant plunge in global trade – among others, Baltic Dry Index at record low levels. Cass Freight Index is an indicator showing the cost of the maritime transportation (excluding energy resources – oil and coal). Data for this index is compiled from many transport companies responsible for 26 billion USD <obrotu>. This statistic is reliable and index clearly shows a drop in transport volume of everyday goods, food, chemicals or heavy equipment.
What you can see is the cost (and by implication a demand for) maritime transport since 2011 to 2016. Today’s situation is below the past average. This is a red flag and an indicator of incoming recession coming to developed countries in America and Europe. By a ricochet, it will affect markets all around the world, especially in the emerging markets thanks to lower demand for imported products and resources.
The fake image of the US growth
The market in the US is disconnected from reality. While the FED is holding any interest rate increase claiming bad unemployment, NYSE prices rise. The same prices that are supposed to reflect the condition of American corporations. The finance world is indeed on its head.
A very good example is one of the most important indicators – Personal Consumption Spending. According to report Q1 ’16 the biggest share of average person wallet (increase by 58% y/y) is healthcare cost. Someone could have thought that increase of the living costs is worsening financial situation of society and this will be seen in stocks. Apparently, this is not true if consumption spending is rising and this is identified as the higher velocity of money circulation in the economy and improvement of the economy overall. Following this logic, it is no surprise that S&P500 is climbing but… for how long?
Is it time to short already here?
Recent weeks S&P500 shockingly jumped even higher and set a new record. Why? The biggest factor for equity price growth in developed countries is: interventions of central banks. Since 2013 we saw the BOJ at the front with the FED being second in the race, joined by the ECB in 2015. The chart below presents their programs. The height of each colour is the amount central banks are using to buy various assets all over the world. Blue and red points out that Draghi and Kuroda (heads of the ECB and the BOJ) are working hard.
Next to data coming from central banks we should also add information from hedge funds, investment banks and transactions made by private clients. Every flow is averaged giving us ability to observe who buys more than sells? Since the beginning of 2015 investment banks are constantly selling assets. Worth highlighting is the fact that this trend has strengthened recently. This is similar to (but will less aggression) hedge funds. The only exception is a curve of private clients who only add to their asset base.
What does it all mean? Central banks with private investors are helping institutions to lower their exposure to still very expensive assets. Smart money works according to Rothschild’s advice: “the last 10%, leave for the others”. Will there be the last 10%? We do not know. It is possible for American equities to reach even higher level but dear readers, you have to remember that in investment, not only price matters but also a potential for gains and losses.
Independent Trader Team