Please don't take my free lunch away...

[haunting]

BRC without an "I" had enough

At some point, the QE will end because if it doesn't or if "they" don't, the US$'s hegemony will end (not that it is not on its way currently), and the cost to "rescue" the "global", or rather the developed nations' economy without too much pain will fail. Already unemployment is piling up, to about 2 mln in the EU and counting, with no sign or end of of the bad bank write down in sight. IMF estimated the EU has to write down about 900bln worth of bad assets while the EU is playing hide and seek and "refused" to acknowledge that they have a problem.

It's not going to end up pretty when it blows. For those who are betting for a quick recovery, I think, it is going to cost them in buying this folly.

A recession, a deep recession or depression are just words, they don't mean "nuthin'". It's the real economy that counts - productivity, savings, reserves, real assets, jobs and plenty of jobs that would make the recession less painful. With QE grossing over the bad assets and bloated wasteful spending of the past, the USA and EU are pulling wool over their eyes, pretending they can QE their way out of the slump. They can do this for as long as the creditor nations are willing to support and pay for them, but now that they are sending out hints of their refusal to continue supporting such endless pit, I doubt if QE is still viable as THE choice of the mother of all rescue. Seriously doubting it!

For those who can't seem to see the paradigm shift, and continue on with their narrow sighted view that once the global economy is recovered, life will go back to normal, ie, to pre-2007 or even pre-2000 era, they are going to be sadly disappointed.

Here's a simple observation which can be verified easily by time or event - the Asian and the rest of the developing economies will be growing, while the economies of the advanced nations, the West, will be stagnant for a long time until the shift of capital and power reaches an equilibrium where one can expect the living standard of the developing nations greatly raised with the living standard of the developed nations, lowering somewhat to allow that happen.

For the third world which is resource rich, the change will be a bliss for those who are hard pressed currently. For those who had been driving SUVs that run 9 miles per gallon, life will be a great adjustment with painful payback to the excesses in the last 20 or 50 years.

...time, it's a changin'... and dun ya take that for granted.

 

[MRC & Co]

Yeh, agreed there haunting. Though I think this paradigm shift could cause a serious resource glut. Just not enough to go around, prices must go higher and inflation must become a problem of gigantic portions.....

 

[haunting]

Hi MRC,

I assume you meant to say there will be a resource shortage instead of a glut?

Yes, I agree in the longer term, the shortage will appear but short term I think a glut is likely due to: a) the huge capital investment in the mining sector world wide in the last few years, and the subsequent new supply coming on line; b) the still sluggish global demand due to the ongoing recession.

My greatest worry is if/when the Chinese begin to play hard ball with Australia. Whilst Australia has her FIRB, the China has her own version of regulatory controls on FDI into their country. Or in this case, threat of monopoly supply or whatever they like to call it in China.

Also, when there is a glut, for example, in the current RIO/iron ore fallout, they don't have to exert any extreme measure... but just by exercising their basic free market right of buying from someone they prefer.

Or anyone other than RIO. I can't see how anyone can stop them.

Cheers.

 

[MRC & Co]

Ah yes, sorry, meant shortage (long day).

Why do you think there will be a glut short-term? I thought a stack of projects had been mothballed with the global recession? Any data you have to show supply of major commodities including those coming on-line over the next few years?

 

[haunting]

You can do a bit research on BHP, RIO and other Aussie mines vs LME warehouse vs demand from China+Japan+S.Korea, etc. Alternatively you can deduce based on this observation that the price of iron ore, coal is dropping. A reflection of supply/demand imbalance. And with global economy still on wobbling feet, you can assume demand will not pick up just like that without a real fundamental need.

The price chart of a commodity generally reflects the state of the market it is in.

Cheers.

ps: the Chinese demand of iron ore, copper, etc has many facets - it's real demand due to their infrastructure needs + restocking + speculators. I doubt if it is sustainable.

 

[MRC & Co]

But Chinese growth (if it is achieved as widely expected) is sure to fuel demand. Compound GDP annually and growth in nominal demand terms for commodites will be a rather large sum......

Price of iron ore, coal etc are dropping, but the price of many other commodities has been rising recently, so I can't see any deduction pointing to a glut in commodity supply based on this?

I'm just not sure there will be a commodity glut, I don't see any real evidence of this (including in prices, other than the recent speculative bubble burst), but I am very interested, because a commodity glut in the short-term would change a lot of my analysis (I am assuming higher commodity prices over the medium-term, along with QE, pushing towards inflation despite the downturn). I really think stagflation could become an issue, with the downturn meaning a mopping up of liquidity could be extremelly hard, considering it will ravage the economy, but will probably save the US dollar from all out capitulation. As you can see, the inflation concern alone is instrumental. Of course, have to wait to see how it all plays out.

BTW, what is LME warehouse?

 

[haunting]

1) first thing first - please do not take what I am saying here as a "sure" thing. It's just my opinion and I could be completely wrong. The only "safe" thing is to trust yourself and your own research. Anything else should be discounted, including the so called experts and market analysts. It's not that they are always wrong with their view, but rather the timing and the objective behind them releasing such information. Time is money and timely information is big money - by the time we read about them expert view, their selected clientele would have already read them, well prepared and waiting for the "public" to react to these expert views.

Also, it is important to keep your perspective relevant, what kind of time frame you are planning for and what kind of time frame you are expecting the demand to pick up? Just for example.

2) The Chinese growth is crippled at best at this point because of the export slowdown, esp due to the US+EU markets which constitutes at least 35% of their export trades. So logically, the past few months' demand should be questioned since it doesn't really reflect the full demand. Restocking seems to be a major activity here and once the warehouse is full, the demand will disappear. So you have to be careful with your assessment that demand will pick up. My own view is iron ore will probably not pick up and possibly decline if/when the Chinese were to press for a further price reduction.

3) Higher commodity price in medium term=how many months/years? Whether there is a glut is subjective, may be I should not have used that word. But try consider this - when demand falls, most mines try to cut back their production. For Rio and Vale, they both cut back their production to reduce supply pressure on price, whilst BHP has not and chose to sell their excess ore in the spot market. If Rio and Vale were to press on with their "normal" production, would there be an iron ore glut?

4) In general and without being specific, I find it hard to accept the argument that commodity price will happen whilst most of the economies are in recession or slowing down mode. For the Asian economies, other than the Chinese' most are still in recovering mode and not in their expansion phase, I can't see how that can support a rising commodity market.

5) Stagflation and liquidity mopping - it will be hard for the USA to really be effective in mopping up all the liquidity they have released into the market. It will be something worth keeping an eye for. I believe this is something quite new to both Bernanke and TimG. So time will tell. But regardless if they succeed or not, the economy of the USA will be weak for a long time to come. For a start they need many years to rebuild what they have lost or spent in the last 20 years. Paul Krugman has kind of hinted it will take at least 10 years, I think that is not exaggeration.

6) Frankly for Australia and Australian investors, it is a waste of time to look at the US economy. Most of the growth will be in Asia and in BRIC. Whilst the people here are talking about the US and are arguing passionately for it, the US smart money and big funds are channelling their money eastward and they are focussing their next profit solely in China and the rest of the Asia.

Unless you are a trader, otherwise don't waste your time in the US economy. Currently with the short term abundant liquidity due to QE, we are being acutely influenced by the US markets, hence it pays to keep an eye on the US markets as they are still providing direction to the local market. But for longer term investment, it will be the Chinese economy and the trend over there dictating term to us because they will be the major consumer in our export (in both goods and services).

Cheers.

ps: LME = London metal exchange.

 

[MRC & Co]

Yep, cheers Haunting, I understand all that.

Keep up the good bogs, some interesting reading.