Equity Markets building up steam
- Global boom unfolding nicely
- Commodities wanting to rally
- US equities ready to surge
- Eastward market rotation is following
- India and China look strong
- ASEAN on board too
- Technology sectors showing strength
- Gold readying for next upmove after recent consolidation
- Resources sector market shares returning to normal
For some time, Dawes Points has highlighted the strength in the US equity markets that was setting the course for the world economy. You may interpret them differently but they have been very resilient and are being followed to the East by the European markets and then further East by India, China and Japan. ASEAN is there too.
It all says a major global boom is emerging. Let’s think about the likely causes and let’s keep in mind the role of gold here as well.
The US economy is growing differently to previous recoveries out of recessionary periods but then the 2007-2009 GFC wasn’t the usual downturn. The vast financial sector leverage coupled with the overextension in home mortgages made it a banking crisis followed by unprecedented central bank intervention. Major debt everywhere and concerns were strong about a major economic collapse.
And as all that fiscal and monetary stimulus came through it would be a hyperinflationary economic collapse.
But that, as you know, was never my view.
What is happening now seems to me to be relating to the hysteria of the obvious peak in the 35 year bull market in bonds and the realisation that the majority of current bureaucrats in charge of central banks really know nothing about markets and are on a political crusade that has no solid basis and will ultimately fail. It would be unlucky for anyone to be relying on these people for investment advice and outcomes.
Despite all this, the market place is now reflecting people who aren’t thinking about central banks but rather making money in a very exciting world. A divergence and possibly a true bifurcation for those with the conventional wisdom of deflationary trends and government control and for those taking the road less travelled to growth and even prosperity. I can see some panic from those in the former camp. Heed the markets, not the commentators.
In my view, the economy in the US is growing but has extraordinary disruptions playing out from major new technologies that are reducing costs and boosting productivity everywhere. The evolution of computer desktops with Microsoft or Google operating platforms with internet connectivity and cloud data storage has provided immense productivity for large and small businesses alike. New applications and the explosion in innovations in power generation and storage are providing numerous investment opportunities. New industries growing and so many dying as these changes come through.
Make sure you are watching the correct indicators.
The entry of China, ASEAN and India as major new markets in with rising middle classes gets general lip service from the investment but the reality is far stronger. I see so much that says it is all ahead go in the world.
Searching for indicators for the future is always the fundamental factor for investing. So much data now and so many opinions make it all very difficult and confusing but it is always useful to just focus on those key indicators that are reliable and timely. The monthly World Steel Association data is probably the best real time indicator of real economic activity I know and because China dominates these figures it also gives and excellent view of the real China.
The numbers over the last two months have been quite extraordinary and show very clearly that China never was going into free fall recession that was so widely forecast.
Indeed, this Dawes Points rate of change indicator recently predicting the upturn very nicely.
The impact on iron ore was likewise just as predictable as the anticipated restocking proceeded. A major rundown in inventory of steel product and ore itself by the steel mills needed to be corrected. The huge volumes on the Dalian futures market also showed massive short covering by speculators and so it went. Record and rising imports of iron ore show inventory ratios are in fact quite low.
I stuck my neck out and suggested we would see US$80 soon. We almost saw US$70 in late April before it pulled back. I am sticking it out again to say this market has bottomed!
This view of steel is helpful especially when combined with this indicator below of metals consumption essentially confirming the continuing consumption strength and clearly no buildup of terminal market inventory. This does not suggest a metals bear market. This says to me less than one week LME inventory.
It says as the sentiment recovers, the demand will quickly absorb this and much more. Much higher prices are coming in the years ahead.
Commodities everywhere were sold off in a frenzy that never truly reflected the underlying supply and demand. Oversold and ready for a very strong rebound.
I come back to technology and I see it everywhere providing minor and major benefits to producers and consumers in so many areas. Computing, telecommunications, innovative power generation, new high performance technology materials (graphite/graphene, lithium, cobalt, scandium, rare earths, titanium, copper, niobium, antimony and much more), automobiles, military technology, space technology, aerospace, consumer electronics), fintech, meditech and the list goes on. And the new technologies are coming from many sources:- the US, China, Israel and Australia.
I think it will also be very important in the next major upleg in global markets that it might actually be driven by the newly wealthy Millenials as their Baby Boomer parent/grandparents shuffle off this mortal coil and pass on their stocks and bond investments. The old industries and dangerous boring low yielding government bonds will be jettisoned to provide the capital for the next leg.
As ever, it is necessary to heed the markets and not the commentators.
Have look at this long term NASDAQ as it is about to break through the old 2001 highs. This very oversold despite recent strength and after a year of consolidation. Looks powerful!
But then look at the Dow Jones 30 Industrials:- It is again challenging recent new highs.
The S&P 500 also looks very powerful, oversold and seems coiled like a spring and ready to go.
The Russell 2000 Small Caps shows similar positioning.
And with the market breadth of the Wilshire 5000 this looks perhaps the strongest.
With the US reporting record sales of automobiles and having strong housing where current levels are still below the required 1.5m dwellings per annum – and are probably still 6m dwellings short:-
The Philadelphia Housing Index thinks so too.
And it seems the Banking Sector is loving it!
Does this look like the end of the world described by those very long the global bond markets and cash?
But let’s now follow the action around the world by just looking `East’ at Germany and the DAX:-
Then the FTSE:-
Then to Asia with India leading:-
And Japan still OK.
The China Shanghai hysteria in 2015 was just hysteria all along as we suggested:-
Hong Kong is OK.
And Sth Korea looks magic.
Even the Philippines is on track.
I can only conclude that the basic thesis of a global boom is still very much on track despite all the recenty increased doom and gloom mongering.
Back at home the evidence is breathtakingly brilliant!!
The Bear is well and truly dead!
The Bull is alive and gaining strength for that +15 year run.
The Resources sector continues to increase market share of All Ords turnover and there is a new spring in the step of the broking community.
It is all happening again out there and from my sector point of view there is a great backlog of capital raisings in the junior resources sector.
My theme of the past 18 months has been that gold is leading the whole global reflation and that Australian domestic gold producers are showing the way.
This graph should bring joy to the hearts of those in the Australian resources industry!
What great indicators these market share graphs are!
Assets are cheap and stock valuations are even cheaper. With some many companies sitting on shovel ready development projects these capital raisings are adding to value and not just diluting shareholders. Enjoy the opportunities!
The other side of the balance sheet shows that the market place is getting more confident now and is showing a slowing in the build up of overall bank deposits and a general strong decline in term deposits and building society/credit union deposits.
I think it is getting very close to a major break out in all major equity indices.
The themes on economic growth, strong equity markets, peaking bond market, good commodity consumption figures, no inventory and a rising gold price etc are all coming into place.
We haven’t wavered in our steadfast views and the portfolio results prove it.
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