Bonds, Gold, Economic Activity and the Great Bifurcation Revolution – Part 2

October 12, 2016 | Dawes Points |

Key Points

  • Bond market tumble continuing
  • Equity markets still robust
  • Commodity price rally underway
  • Oil prices heading higher
  • Bifurcation Revolution picking up momentum
  • Transportation and technology revolutions majestic in process
  • Small resources stocks flying
  • BHP RIO and larger miners up strongly
  • Oil stocks excellent value and moving up
  • Gold Sector correction providing base for heading higher

Last week in the Bifurcation Revolution the topic was the rolling over of the global bond market and the robust nature of the moves in the Resources Sector.  Commodities seem to be steadying after seven years of declines and a wide range of resources commodities from zinc to coking coal have already made strong moves in 2016.  Oil prices have been firmer after the OPEC agreement on production but demand has been rising and a balanced market and WTIC prices near US$60 are likely for end 2016.

The big miners BHP and RIO have done well and are chasing that superb company Fortescue and the ASX oil majors are recovering.  Big US oil companies are also doing well.

US Bonds are weakening and yields are rising at the margin.

The 10 Year T Bond price is leading the pack lower.  This trend looks ominous but the price needs to be below about 125 to really break down and that could still take some time yet.

The 30 Year T Bond is about to say more and even a 1% fall from here would be doing important technical damage.

Although it would be the conventional wisdom that weaker bonds mean higher yields, and thus the discount rate on stocks’ income streams must rise and bring equity prices down, the market reality might just well be something very different.

It is something of an understatement to say that US$100tn tied up in bonds is at a record level.  A record level against global GDP, global equities and global assets. I can’t imagine world history ever having so much tied up in one market and as they say – if you owe the bank $10,000 you have a problem but if it is $10m then the bank has a problem. Governments of the world have a US$80tn and mostly short-dated bond problem.  Other borrowers have their own US$20tn problem but they may have very long maturities so may be that is not such a problem.

Now bonds have another quirky feature in that almost all have a finite life (British Consuls were perpetual bonds that were first issued in 1751 and the last of them were finally redeemed in 2015) meaning that they need to be repaid at maturity and probably rolled over to the next issue.  As interest rates fall the new interest rate coupon is most likely to be lower and as interest rates rise the annual coupon needs to be higher.  The issue price of the bond can of course be set higher (or lower) than the par price of say $100 to keep the coupon the same as the last issue and give a lower (or higher) yield to maturity.  A $99.50 priced bond gives a higher yield at a 2% coupon than a $100 priced new issue bond at the same coupon.

As noted last week, the US Government Treasury Bond Portfolio has 70% of its issuance with less than five years’ maturity and the US Treasury is issuing 90 and 180 day bills at very small interest yields so the overall portfolio interest cost is relatively low at about US$400bn pa on its US$13.5tn outstanding debt.  There are another US$6tn of debt somewhere.

But keep in mind that US$400bn in annual interest could very quickly get to US$1,000bn if rates rose 2% points from here.

US pension funds generally have a far higher proportion of bonds than equities in their portfolios as they try to match the portfolio maturities with their pensioner obligations, and while the US economy continues to grow it would be expected that these pension funds will maintain or increase their demand for bonds. Central Banks are also likely to be continuing buyers of US T Bonds.

But again as noted last week it has been domestic investors who have been buying bonds in the past year.  Part of the Fear Trade and the Flight to Safety. If yields rise and bond prices weaken, it could be expected that these domestic investors might just abandon the Fear Trade and join the Bifurcation Revolution and start chasing equities that are now pushing very hard at very long term resistance.

The major equity markets around the world are looking just brilliant!

The Bifurcation Revolution Party is now just starting!

These are my favourite indices at present:  Nasdaq and the FTSE. Then the DAX, the Wilshire (very broad US domestics stock index, Kospi (Sth Korea) and the Nifty (India).

Most have made recent new all time highs and yet the momentum indicators are still oversold.

NEW HIGHS IN NASDAQ.  Disruptive Technologies.  Creators and destroyers of wealth. Get on the right side.

MASSIVE BREAK THROUGH 7000 for the FTSE!!!!  7100!!   YOU WERE TOLD ABOUT THIS!!!

Looks like Brexit is going to be very successful for the UK.

The DAX in Germany has been leading and is now ready to resume its upside thrust.

The broad 6500 US domestic listings Wilshire Index is making new all time highs again.  Small caps are also doing well again.

Is Sth Korea is about to have a strong run very soon?

India looks good and its domestic interest rates are heading lower.

These markets appear robust and about to move substantially higher.

Even commodities are looking up and as we saw last week, metals and coking coal have been heading higher.

Crude oil is looking good here.

As is Natural Gas

So all commodities seem to be moving higher.

So get this right.  Bonds weakening and equities and commodities rising!

So commodities are rising against T Bonds.

So all the above is simply a cyclical response to an extended period of low interest rates and it sounds like Economic Boom to me!

Could all the above be the manifestation of inflationary pressures building up within the economy after so much quantitative easing?

Or could it be the 3300 m people in Asia that are driving all this as these graphics from last week pointed out?

We don’t know yet but the overall picture is still compelling.

But there is so much more to the Bifurcation Revolution.

Take Transportation.

Then start with the significance of the One Belt, One Road (`Belt/Road’) infrastructure developments (graphic from HKTDC).

Consider also that China is actually looking west, not east, for its markets and political influence.  Those 3300m people are to the west of Shanghai and another 1500m people make up the markets in Eurasia and Europe.  Think BIG.

Source:HKTDC

And also consider the oil and gas pipelines along with the railways and highways.

Infrastructure Development and China and Central Asia” is republished with permission of Stratfor.

A bold initiative that may or may not be realised, but if it is it will change the world.

China could be seeking to link markets in all of Asia and into Europe to give it rapid access to imports and exports by land and to play down its reliance on seaborne trade.

The outcome could be fascinating with China outflanking the Islamists in the Middle East and the `Stans and maybe also the US’s (very expensive) global naval presence.  Who knows?

Anyway, let’s just start with China and its internal railways.

The growth of the high speed rail network in China has been amazing as is the actual experience of travelling on trains at >200kph running from Beijing to Shanghai.

Much of the network is already installed but much more to come.

The entire network is growing substantially and we watching the integration of all of Asia.  From Siberia to Singapore.  Shanghai to Kazakhstan. Burma to Turkey. Connections everywhere.

The benefits to international commerce are major and unprecedented.  Internet and rail travel.  Freedom and mobility to even the smallest player.

Even Saudi Arabia with its 2030 Vision wants to further encourage Chinese investment in Saudi Arabia and to join in the One Belt One Road revolution.

The Asian activity is high but so is that in Europe.  Major new high speed trains, lines and linkages.

And maybe also in the US.


Seems everyone is building even faster trains.

The technology advances associated with VFT networks are extraordinary. From rails themselves and ballast electric motors, high speed bogies, fuel efficiencies, super strength lightweight carriages, power gantries, pantographs, power receptors, braking systems, communications and all manner of new safety devices.

All use raw materials of steel, copper and cement and many utilise high performance materials from alloys and composites to ceramics.

And this transportation revolution is just not with trains.  Aircraft demand and technologies are equally breathtaking.

Boeing’s view of the world says 100% growth in the world aircraft fleet by 2035 and current aircraft will make up less than 15% of that fleet.

QANTAS plans a nonstop London Perth 14,000km and 19 hour direct flight in new Boeing 787-9 for 2017.

Richard Bransons’ Boom Supersonic Airliner will fly faster than Concorde and is planned to be flying by end 2017.

And we haven’t even got to motor vehicles with electric cars and all sorts of hybrids.

Or power generation, energy storage and water.

All these transportation gains are likely to significantly boost person to person contact which is true commerce.  It may not be GNP related but it will certainly boost commerce and trade.

And then there is the Virtual Reality and Augmented Reality revolutions.

Do you know what these new technologies might mean?

It is starting with games and entertainment but it will soon envelope business communications and open up vast new marketing, service and advertising avenues.

You may think it is not for you but in time will probably soon include you.

Have you caught up with what Microsoft, Facebook and Google are already doing here?

Look at these new means of communication.

Key internet and communications companies are progressing rapidly with VR:-

Microsoft already has VR developer capability with the development of its “Mixed Reality” HoloLens platform – https://www.microsoft.com/microsofthololens/enus/whyhololens

Facebook wants to connect the world –https://www.facebook.com/zuck/posts/10101319050523971

Sony Headset launch for PlayStation – http://www.mirror.co.uk/tech/playstation-vr-price-release-games-7562323

There will be extraordinary applications of VR in entertainment and sports –

Would you pay a large sum to sit in the front seats in a 3D VR performance by your favourite artists from the comfort of your own home?   You probably would.

Real Estate and tourism will have major marketing revolutions with this system.

No waiting for opening hours for that new apartment or actually staying clear of real lions on your VR safari.   No breathlessness on top of Mt Everest.

And Social Media and business conferencing will also be revolutionized.

Watch this video!!

https://www.youtube.com/watch?v=xMgoypPBEgw

Can you imagine meetings with friends or family in lounge of a famous hotel or the dining room of a great restaurant with each person engaged as a person or his avatar.


Example VR World: avatars meeting in the VR environment

VR has become the fastest growing new media platform for the world of tomorrow and starting today.

China’s Central Government has also introduced aggressive policies to support high technologies with a strong emphasis on Virtual Reality technology and content developments. By 2020 China is expected to capture 1/3 of a global VR market generating US$30 billion in revenue. The current pace of development in China VR businesses would suggest that China alone will exceed most of the Western industry forecasts and may end up dominating the world VR industry.

You might not yet be part of it but it is coming now very quickly.

What does all this new technology mean and how can we play it?

The best place to start is with the big mining companies that are experiencing record demand for their products as iron ore, coking coal, copper, aluminium, zinc and nickel and are running a near full capacity in most operations.

XMM.ASX  – The Metals and Mining Index has broken its 2011-2016 downtrend and seems heading for much higher levels.

The turnover share has also kicked up nicely to say that Resources Shares are back!

BHP, RIO, FMG, S32 and OZL and for the oil stocks WPL and STO are good for a start.

There are a plethora of smaller players in copper, zinc, lead and tin as well as rare earths, technology metals and mineral sands.  And oil and gas.

Ask me for details.

Gold still looks very good to me for all my earlier reasons and a market update will come out soon.

Many small resources stocks have had stellar runs in recent weeks.   We have been on board quite a few lately but there will be many more.  So many stocks with valuable assets have been trading at ridiculously low prices so these runs are to be expected.

All this is having an effect on the A$.

In US$ we seem to be ready for a upmove:-

And we have already been strong against Sterling and the Euro.

The markets appear to be bringing together the strong themes of this fork in the road away from bonds and the Fear Trade and towards growth and better times.

So it now becomes a matter of flow of capital.

As a post script I also have two technology related opportunities:-

Aspermont (ASP.ASX)  – digital publisher with global resource sector dominance
GoConnect (GCN.ASX) – early mover in VR commercialisation.

Barry Dawes
BSc FAusIMM MSAA

I own all the ASX listed stocks mentioned here.

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