Global Boom Well Underway #69

September 5, 2017 | Dawes Points |

Key Points

  • The Fear Thesis has failed!
  • Global GDP growth all on track for accelerating expansion
  • Commodities are signalling boom times have arrived
  • The Dawes Points Global Economic Boom is well underway
  • Expect 15 years of prosperity
  • Gold now above US$1300 and 6 year downtrend broken
  • Copper exceeding US$3/lb
  • Iron ore on its way to US$100/t again
  • Zinc, Aluminium, Lead and Tin strong
  • A$/US$ testing 100 year down trend
  • Resources sector earnings powering along
  • Equity markets continuing surge
  • Seaborne freight rates moving higher
  • Australian investors massively underweight resources
  • ASX.BHP, ASX.RIO, ASX.FMG, ASX.S32, ASX.CL1
  • And hundreds of smaller resources stocks

Heed the Markets, not the commentators‘ has been the defining theme of Dawes Points these past few years and this approach has held up very well.  The Fear Trade Thesis has failed. The Global Economic Boom rolls on!  And it will last a long time!

How often have key investment banks, journalists, newsletter writers and `gurus’ given you the Fear Trade Thesis and told you China would fall over, Europe would crash and the US enter its Greater Depression.  Debt would overwhelm everything.  That oil would be US$20/bbl, iron ore sub US$30/t commodities would fall and gold was not required because there was no inflation?  That the world needed income at any cost and that fixed income such as bonds was the only answer. Often.

North Korea is the latest Fear but Australian shares holders have been more nervous than those in Sth Korea, China and Japan.  This particular Fear has been around for a year or two but look at the past four quarters for stock indices in Asia and in the month of August 2017.

China and Hong Kong powered away in August and in the last week the All Ords was down 0.4% with Japan up 1.23% and Sth Korea down just 0.88%.  Some Fear Trade!

But look at the past 11 months.  Australia how pathetic.

Quarterly Performances of East Asian Stockmarkets

Well, whilst the North Korea Fear has really yet to run its course, NONE of the other gloom has really  happened.

So the question for all the Bears is why hasn’t the Fear Trade worked?  What do you have to say for yourself?

In contrast to the Fear, economic GDP growth figures have remained robust, equity markets around the world have gone to all time highs, prices have risen for many commodities and property remains in a global bull market.  What is to Fear?

OECD’s GDP Data and Forecasts

More recent data have been stronger in the US with estimates revised upwards and also for Japan which is showing life again after almost two decades in the doldrums. Growth is accelerating!

The US$ which was supposed be strong with rising interest rates just isn’t. Market data, earnings data and prices of equities and commodities have continually exceeded general ‘consensus’ forecasts and those reading these actions would not be happy.

For the Bears who have been fortelling gloom for all of the past eight years since the lows in general equities in March Qtr 2009, what will their story be?   An epiphany or is it a generational change coming.

The only real answer to why the Fear Trade hasn’t worked is that people make the markets.

Not economists, Presidents, central banks, politicians, public sector bureaucrats, journalists nor ‘the media’.

People.

And people make the decisions. People outside the professions, bureaucracies and corporate operators.

People and their dreams and fears. There are just times when people feel enough fear and bearishness to continue to withdraw from all markets and commerce and to just sit pat and build up a large wad up of cash.  Stay calm.  Reduce risk.

But new clothing, birthday dinners, a new car and just general stuff need to be bought. The coming of age party, the wedding, upgrading a house or new child just have to be paid for.  Personal technologies always become `must have’ items. The list goes on.

And life goes on, steadily.  Wonderful.

However.  1400m people in China have next to no consumer debt and just want to raise their living standards.  Another 1300m in India.  600m in ASEAN.  1000m in Africa.

Lives of these people are tearing along at a great pace albeit from a lower base.  Around 1000m will be entering the `Middle Classes’ by 2025 we are told.

Those living standards will require much more steel, copper, aluminium, zinc.  And oil and gas and other energy sources. And food, especially protein.

The dreams of these people in Asia and Africa are far different to the fears in the West but rises in equities and commodities and falls in Western defensive bond portfolios are changing these Western fears to dreams again. And the dreams just might get a solid boost very soon in the Dawes Points World.

It is when the sirens are loudest on gloom that the best buys are made.

Heed the markets. The biggest markets are the most important markets.  And the biggest market, the bond markets, has had all the hallmarks of bloated, irresponsible (read government deficits) and speculative (`free money’ for amoral politicians to buy votes) activity that marks a market high.  Professional and Retail Money to the tune of around US$100trillion was sucked in.  There probably has never been such a concentration of global capital in one sector ever in economic history.

A crowded trade.  A one way market. How will it end?   Slowly declining at first because massive pension funds continually need long term confident yields to match long term liabilities.  Pension inflow keeps rising but when safety refuge is no longer required then bond risk rises and pushes up yields and then coupons.

In contrast, global equity markets have surged higher with the US amongst the leaders but it is not necessarily the key driver.

But with the US, there is a definite change in mood.

Consumer confidence is at a ten year high but note that this Index was already moving higher and has accelerated under Trump’s Administration.

US Consumer Confidence Index

Heed the Markets!

Now look at this graphic of the Dow Jones 30 Industrials.

Pushing on the trend channel overhead resistance line.

I can’t recall ever seeing a market do this.

Usually markets hug the bottom channel trend line as support. This market is continually pushing against resistance!   This is suggesting strength.  And probably great strength. No Bear here???!!!!

I am still seeing so much commentary about stock market crashes to be caused by something but I also keep seeing data about investors seeking the safety of bonds.

This graphic doesn’t suggest a market rolling over after spiking into a major high but rather one about to move up strongly.

In the longer term focus, should stocks break higher from here then the move could be quite sharp and rapid.

 If this view is correct then there could be 3,-4,000 Dow points added by year end.

Long Term Dow Jones Trend Channels – Coming acceleration??

Keep in mind it is always `Sell in May and go away. Come back on Labor Day. (1st weekend in September)’.

September might just get a few underweight investors excited when they return from holiday tomorrow.

Here in Australia the All Ords has been woeful.  Truly underperforming.

All Ords Long Term Trend Channel  –  Big upside coming

But there is hope.  The short term picture is suggesting a sharp break higher through 5800 and to targets above 7000.  This should come very soon.

All Ords Short Term Trend Channel  –  Big move coming very soon

Dawes Points considers that it will be the Resources Sector through copper, gold and iron ore that pushes this index sharply higher.

Dawes Points has also highlighted just how long this correction has taken after the preceding 10-12 year bull market.  Strongly indicates that this new bull market leg will now last for years.  Fear takes a long time to flush out but as early entrants make very high returns and book profits so will new entrants keep coming in a virtuous circle that will last many years.

It is happening right now.

The Australian Resources Sector relies primarily on the global steel industry with the three major stocks ASX.BHP, ASX.RIO and ASX.FMG being critical drivers.

This focus on the steel industry in China has been so important as it is a true real time indicator of economic activity in the world’s largest economy for raw material consumption.  China produces almost 900mtpa of crude steel and consumes about 800mtpa.  The US produces 84mtpa and consumes 120mtpa. China consumes over 50% of the world’s steel and over half of most other metals.  What happens there determines what happens in resources commodities and steel is an excellent indicator.

India, is also emerging as a major force in the demand for commodities. Crude steel output in India exceeded 100mtpa in early 2017 and is on track to soon pass Japan as the world’s second largest steel producer.

China and India with 1,400m and 1,300m people respectively have rising middle classes that have rising personal disposable incomes that produce rising living standards that require more consumer goods and governments there are to provide improving infrastructure to cater for more housing, services for health, education and welfare and transportation.

Again, this is most easily seen in steel production and consumption.

It is also seen in demand for gold. China and India almost ARE the gold market.

So the mine supply vs Chindian demand results in a major transfer of gold from the mines in the West (and from bank vaults) to the people of Asia.

Copper is moving up strongly as it should with no inventory, improving economic activity and insufficient new supplies.  This bull market should run for many years so you can pick your own price target for your time frame.  US$6/lb within four years is my call.

Why do we say this? It is not just a `chart target’.  Disjointed supply and demand in commodities produces some very low prices and some very high prices.   Short covering doesn’t just occur at lows.  It also occurs at highs!

VERY IMPORTANTLY note that the rally in copper into 2011 exceeded the 2008 high.  This indicates very great internal market strength.

Or in other words, much higher demand than is currently forecast, no inventory and insufficient near term mine supply.

Long Term Copper Channels – Now in next channel with resistance around US$3.50

This US$ Gold break upward is of MAJOR significance. The six year downtrend from 2011’s US$1923 high is now broken. And Gold’s 2011 rally above 2008 shows even more internal market strength.

The 11 year bull market followed by a six year correction should lead to a 15 year or more bull market to come!

Or in other words, transfer of gold from West to East, Asian jewellery demand exceeding mine production, severely depleted gold inventory in the West and some serious short covering to come.

Long Term US$ Gold Chart  – Six Year Downtrend broken  – Price Targets are High!!

Iron ore is still considered by Dawes Points to be in a major bull market and, as we saw with copper and gold, new highs were made in 2011.

Dawes Points very successfully called the US$ iron ore price in 2016 and US$95 into 2017 and the US$100 by mid 2018 target still holds.

Current focus on the high grade >62%Fe haematites is showing the strong markets with premiums for grade but substantial discounts for lower grade material.  This market action is indicating that global reserves and resources of high grade iron ore are being depleted.  Blast furnaces operate on volume of the furnace so higher grade iron ores put more Fe units (1 unit = 1% = 10kg/tonne) for the same volume.    Strong demand for steel in China is keeping blast furnaces at high operating rates so high grade is better.  Also higher Fe grade means better operating efficiency, less coke and fuel and marginally less furnace slag to dispose of so reduced emissions and environmental benefits are noted.

RIO’s new Silvergrass  mine is higher grade ore to meet current demand.

Most of the 140mt of China port stocks is lower grade from marginal mines  (and not from FMG) so it does not really affect overall iron ore prices just now but there is always the price/grade trade off and the market should move back to reduce discounting over the next year.

Iron Ore CIF Tianjin 62% Fe

The preference for high grade Fe content brings us back to the need for our favourite magnetite concentrates as furnace feed.  Fe3O4 is just better all round than Fe2O3. Magnetite with 69-72% Fe delivered as a concentrate product not an ore. Consistent grade, fewer and lower impurities and worth US$20-40/t more than current 62% hematite. Lot’s to like.

House stock ASX.MGT along with ASX.IRD, ASX.HAV and ASX.CAP have some lower capital and opcost magnetite projects in Sth Australia. Watch them.

The monthly check on crude steel shows boom times still with close to 900mtpa in China.  India, RoK and Japan did well also.

Crude Steel Production in China Close to 900mtpa – US Hit 7mt in a single month – first in 2 years

So it will be the Resources Sector Leaders that will push up the Australian market.

And note this:-

A recent survey by ASX-listed Class Super (ASX.CL1) on its 140,000 Self Managed Super Funds (~24% of all Australian SMSFs) showed only 29% of total capital was invested in listed equities and 22% of total capital was in cash and term deposits.

Only BHP and Woodside as Resources Stocks were represented as having  more than 1% of all capital. And less than half the accounts held them.

An article on this asset allocation referred to the Future Fund and Family Offices had similar defensive portfolios.  Bizarre.

Class Super SMSF asset Allocation Showing Low Equities and High Cash

The world is underweight Resources Stocks through the Fear Thesis

So look at these Resources stocks that will drive the All Ords.

BHP   Copper, Iron Ore, Coking Coal and Petroleum

BHP to Reach New US$ Highs by end 2018

BHP is much leaner and the balance sheet is better.  Dividends will be flowing through.

RIO  Copper Iron Ore Aluminium

RIO Has Broken Out with New US$ Highs Likely

RIO is in the best shape of the past 20 years.

FMG  Iron Ore

Just a brilliant company!  Output 170mtpa and costs under US$12/t.  Balance sheet improving and dividends really flowing.

We should add BHP spinoff ASX.S32 to this list.  A great company!

Did you see the recent June half results for the iron or operations of BHP, RIO and FMG?  Some strong numbers.  Much more to come.

Hard to imagine they will be lower in the Dec Half of 2017.  A stronger A$ might crimp June 2018 but with >US$100/t maybe not.

The improving resources market is showing up in rising global sea freight rates.

A major increase in the supply of shipping caused a major decline in freight rates and distorted the significance of this Index.  However, over the past few years, balance has returned and it is now closer to its previous indicator status.

And it is saying global trade is improving.

Baltic Sea Freight Index on the rise again

And bringing this all together is the A$/US$ rate.

The A$ was strong into 2011 (note this was another market that was strong in 2011 so will be very strong in this next leg) and broke the 1913 downtrend.

This is over 100 years of history.

After the pullback into 2014 the A$ is rising and will again break this 100  year downtrend once US$0.81 is broken.

103 Year Long Term Graphic of US$/A$    A Major Turn Here.

Heeding the markets not the commentators has paid off handsomely.

Investors have numerous opportunities to increase your wealth significantly over the next few year.

Seize the opportunity!

Barry Dawes BSc F AusIMM (CP) MSAFAA

 +61 2 9222 9111
bdawes@mpsecurities.com.au

Dawes Points #69
5 September 2017

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