Cheap and Easy

Wednesday, 17th February, 2016
Albert Park, Australia
By Kris Sayce

 

  • Redefining meanings
  • Enough already
  • Hope, at last

 

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After that, the price increases by more than 60%.

If you haven’t yet discovered what Quant Trader is all about, go here…unless you’d rather pay 60% more tomorrow. If so, wait for the link in tomorrow’s Port Phillip Insider.

Markets

It was another strong night for US markets overnight, following big gains on Friday.

The Dow Jones Industrial Average climbed 222 points, or 1.4%.

The S&P 500 index gained 1.7%.

In Europe, the indices were mixed. The FTSE 100 index gained 0.7%. Germany’s DAX index fell 0.8%.

In Asian markets, Japan’s Nikkei 225 index has given back some of the previous two days of gains. As I write, it’s down 1.5%.

The Shanghai Composite index is down 0.2%.

The Aussie S&P/ASX 200 index is down 0.7%.

As for the gold price, we enthusiasts have been shoved back into our box somewhat. Today bullion is trading at US$1,207 per ounce. In Aussie dollar terms, it’s at AU$1,703 per ounce.

Speaking of gold, stories of the ongoing credit bubble are never far away…

Redefining meanings

The Financial Times reports:

China’s record expansion of credit in January reveals Beijing’s policy priorities. It sees avoiding a “hard landing” for the economy as more critical than imposing control over what some analysts call a debt “bubble”.

It’s an interesting idea, this whole concept of ‘avoiding a “hard landing”’.

If you’re not familiar with the term, a ‘hard landing’ is a euphemism for a recession or economic bust.

Central bankers and governments don’t generally like ‘hard landings’ if they can avoid it. That’s because there’s always the threat that a recession, or bust, will cost them their jobs.

What they prefer is a ‘soft landing’. What does that mean?

Well, it doesn’t actually mean what folks in the mainstream think it means.

What they think it means is that, instead of the economy crashing, central banks can use interest rates to guide the economy back down from on high.

And how do they do that?

This is the funny part.

In the ‘good old days’(as in, no more than 10 years ago), the concept of engineering a ‘soft landing’ for the economy involved…get this…slowly raising interest rates.

Remember, the idea is that, in order for the economy to boom, interest rates are likely to have been held relatively low. The low level of interest rates led to a boom…it led to easy credit…it led to more spending and more investment.

All this caused prices and markets to rise.

So, fearing that things could get out of control — again, in the good old days when central bankers worried about inflation rather than openly encouraging it — the central banks would start to talk about the prospects of higher interest rates.

Then, when they felt it was ready, they would slowly raise interest rates. Not to crash the economy or stock markets mind you, but to engineer a ‘soft landing’…a gradual slowing in the advance of prices and markets; and maybe even a little bit of a fall.

It’s a neat little theory.

It’s also a theory that fails every single time. And yet, the central banks and mainstream economists continue to try to engineer the fabled ‘soft landing’.

Why do they continue with such foolishness, even though attempts at engineering a ‘soft landing’ have a 100% failure rate? That’s because they are economists.

And economists, despite all the evidence to the contrary, continue to insist that they are scientists. They believe that the rules and laws of economics are as predictable and repeatable as the laws of chemistry, physics and biology.

Fools.

Economics isn’t a science. Economics is merely the study of human behaviour. And any study of human behaviour will tell you that, while some things may prove an exception to the rule, not everything is predictable.

That’s because it’s impossible to accurately forecast how individuals will act and react.

Yet, economists continue to believe they are scientists. They plug numbers into a spreadsheet, as a physicist might do when calculating a rocket’s trajectory.

But while the physicist may be able to calculate almost precisely where the rocket will land, the economist has no idea about what the consumer will do.

If it were possible to accurately predict every form and branch of human behaviour, then all stock prices would trade at almost perfectly stable levels every day.

After all, if you knew for certain ‘where the stock would land’ in the future, there would be no need to buy or sell it, because that future event would already be fully priced into the stock — and everyone would know it…if you get my drift.

But back to China. It seems the concept of a ‘soft landing’ has changed somewhat. It also seems the remedy for engineering a ‘soft landing’ has changed too.

As we gaze longingly upon the chart below of the Shanghai Composite index, we’re inclined to think that China’s economy (in stock market terms) has already had its hard landing…more than once:



Source: Bloomberg

The Shanghai Composite index is down 45% from its high in 2015. That’s a greater fall than many Western markets experienced in 2008 and 2009.

And if we were to drag the chart across so that we could see back to 2008, you would see that the Shanghai Composite index fell 72% from the peak in 2007 to the trough in November 2008.

But, as we say, not only has the idea of a ‘soft landing’ changed, the remedy has as well.

It seems to us that China isn’t actually trying to prevent a ‘hard landing’; it’s actually trying to prevent an ‘even harder landing’.

Why else would China’s solution be to increase credit?

On second thought, perhaps the idea isn’t to prevent an ‘even harder landing’. China’s central bank is simply trying to do what every other central bank is trying to do — engineer another price and asset bubble.

That’s the real reason for cheap and easy money in China. Not only in China, but in the US, Japan, Europe, and right here in Australia too.

‘Cheap and easy’ — it’s the new slogan for central bankers everywhere.

Enough already

They just can’t take it anymore, so they’re getting out. As Bloomberg reports:

The giants of the iron ore industry have claimed their biggest victim yet: Anglo American Plc.

The 99-year-old mining company, reeling from a $5.6 billion loss last year, is pulling out of iron ore and Chief Executive Officer Mark Cutifani described a bleak outlook for the material. The exit marks the result of a strategy, employed by the world’s largest producers, of continuing to expand output in the face of plunging prices. BHP Billiton Ltd. has described the tactic as “squeezing the lemon.”

I’ll admit I don’t get the ‘squeezing the lemon’ reference. Perhaps smarter folks can drop me a line to letters@portphillipinsider.com.au and fill me in. I assume it’s not a crude or inappropriate reference.

Anglo American plc [LON:AAL] is a reasonably big company. It has a market capitalisation of £5.1 billion (AU$10.28 billion). So it’s no small fry.

That’s almost twice the market cap of Fortescue Metals Group Ltd [ASX:FMG]. Mr Cutifani could be right about the outlook for iron ore. As for my opinion, I’ve got no idea of where it will go next.

But then again, Mr Cutifani would say that it’s a bleak outlook, given that Anglo American is pulling the pin on the sector. He’s hardly likely to say that ‘iron ore has a great future, and that’s why we’re abandoning it now, right at the bottom.’

So we wonder. Could this, of all things, be an indication that the bottom is in for the resources sector? Could this be the iron ore equivalent of gold’s ‘Brown Bottom’?

(Gold bugs know the reference. It refers to former UK Chancellor of the Exchequer Gordon Brown’s decision to sell half the UK’s gold holding right at the multi-decade low.)

On the other hand, it may be premature to jump in now. The resources sector has had many false dawns over the past four years. Your editor, for one, has predicted a rebound in the resources sector at the beginning of 2013…2014…and 2015.

And even this year I couldn’t help myself by telling our Alliance members that they should consider buying gold stocks in 2016. That prediction has done OK so far — but by no means does it make up for the disastrous predictions of prior years.

As always, we’ll see. But if we’re right…if this is the bottom of the iron ore and resources market, expect us to tell you that ‘we told you so’ at some point in the future.

Hope, at last

On the subject of market rebounds, our resources analyst, Jason Stevenson, has finally seen an upturn in fortunes.

There haven’t been many tougher jobs in the market over the past five years than being in the resources stock recommendation business.

But Jason has done it with aplomb, and continued to look for outstanding opportunities even as the market continued to turn against him.

So it was a joyous event this week when Jason could tell his readers that:

At the time of writing, [our resource stock pick] is up 550% from 0.7 cents to 4.6 cents. It’s up roughly 360% from the buy-up-to price of 1.2 cents.

The stock opened the next day slightly lower but, even so, readers who followed Jason’s advice could still have bagged up to a 242% gain.

Good work…in an awful market. Check out Jason Stevenson’s work here.

Cheers,

Kris

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End of day market data

If you have any ideas about what you would like us to include in our end of day market data drop us a line at letters@portphillipinsider.com.au, and type ‘Market data’ in the subject line.

52-week highs: 20 stocks, including CIMIC Group Ltd [ASX:CIM], Domino’s Pizza Enterprises Ltd [ASX:DMP], St Barbara Ltd [ASX:SBM], and The Reject Shop Ltd [ASX:TRS].

52-week lows: 37 stocks, including GUD Holdings Ltd [ASX:GUD], EQT Holdings Ltd [ASX:EQT], Reckon Ltd [ASX:RKN], Patties Foods Ltd [ASX:PFL], and Tower Ltd [ASX:TWR].