Long Term Intermarket Analysis: Gold, GDX, USD, US Equities

[Billy]

Here's an interesting LT perspective by John Murphy, but without any consideration for Fed policy.
Billy
17498

[Pascal]

Here's an interesting LT perspective by John Murphy, but without any consideration for Fed policy.
Billy
17498

This article is also interesting. It is related to QE and the dangers of QE.
The comments are very interesting too.

http://www.project-syndicate.org/commentary/the-risks-and-costs-of-quantitative-easing-by-nouriel-roubini

It is interesting to see how the policies of the different countries will work out:

- China needs exports to provide work and to grow into a major power that it is already. They want to peg to the US$ and end-up with an increased amount of US$ in exchange of exports.
- Japan needs exports to pay for its aging population they lower the Yen, buy US$ and end-up with large amounts of US bonds/US$.
- Europe needs exports but does not agree on the policy to follow regarding the Euro. You need unanimity to change the course of the current policy. Germany says "no printing" and the population of southern countries is voting for politicians who will promise free money.
- The US needs to rebuild its industrial base in order to limit imports and provide jobs.

These equilibrium are slow to evolve. I believe that the Fed is right to buy bonds and hence to provide hope instead of letting the deleveraging pain to take hold. I welcome a currency war and hope that all the countries will print more... if that money goes to productive projects and not just entitlements.

One important question is why are commodities (including agricultural products) so low in the context of global debt monetization. It is because the money is used to pay old debt and not to start new projects.

Low commodities prices mean something important: the production of goods - and food - is not strong enough to push prices higher. We can see that stocks of Copper, Aluminum, Zinc, Nickel, Lead are all almost at a five years high.
The rich countries (US, Japan, Europe) are simply slowing their consumption. They are buying less and hence prices come down.

What will happen next? As soon as "growth" is re-discovered, stocks of these basic materials will start decreasing and all the free money will move back into hot assets, igniting inflation in a big way.

As of now, no "discovery" in sight, but we might have a general food crisis earlier than we expect as grain stocks themselves are very low. That is where the real problems could come from. Why did Warren buy HENZ?



Pascal

[adam ali]

Pascal,

If new projects are not being undertaken, ceteris paribus that would mean prices should firm, as supply vs demand tips in favor of demand.

In my experience, observational rather than direct, at the end of long-term commodity cycles, there is an oversupply created from all the projects that came on stream when profitability was high. As the cost inputs (e.g., energy, labor, etc.) to commodity producers rise, margins undergo contraction. As margins contract, the potential profit from new projects decline, leading to those projects being cancelled. And on it goes...we are now at the stage of oversupply and project cancellation.

In terms of Heinz, it is a commodity processor and distributor. If agriculture costs are set to move higher, then one would assume its margins should contract unless it is able to raise its prices. So the question is whether Warren is making a bet on lower input costs going forward or Heinz's ability to charge more. Or something else...