By Chris Berry (@cberry1)
For a PDF of this note, please click here.
At this point, what could possibly be said about the economic health in the Euro Zone and the prospects for growth that hasn’t already been said? Realistically, the only question that has yet to be answered is how to ignite growth? This is a question you could ask about numerous economies around the world, but the structural challenges in the Euro Zone and the fact that you have a political union but not a financial one appear to be the reasons for what little growth actually exists.
With that in mind and with the European Central Bank (ECB) essentially out of ideas, the announcement of a quantitative easing (QE) program of €60 billion per month was likely the worst kept secret in finance. Specifically, this program will take the form of an asset purchase mechanism where the ECB will buy government bonds, private sector bonds, and debt securities of European institutions totaling €1.3 billion during the “life” of the program. Many would argue that the QE programs in Japan and the US have failed to achieve their objectives and this is why I mentioned Albert Einstein in the title of this note. He’s credited with saying that the definition of insanity is doing the same thing over and over and expecting a different result. Is anyone in the ECB familiar with this?
In just the month of January alone, central banks in Denmark, Turkey, India, Peru, and Canada have all lowered rates in an attempt to ignite growth. Additionally, the People’s Bank of China (PBOC), quietly injected USD $8 billion into the domestic banking system via a 7 day reverse repo lending facility. Clearly, the Swiss National Bank’s un-pegging the Franc from the Euro was the first domino to fall and other central banks around the world are positioning for a challenging way forward.
By Chris Berry (@cberry1)
For a PDF of this note, please click here.
The unprecedented response of Central Banks to stimulate growth in the wake of the Great Recession has been unlike any before it in history. Trillions of dollars worth of liquidity was pumped into the global financial system in hopes to stimulate aggregate demand and growth rates. In the United States alone, the balance sheet of the Federal Reserve has ballooned from $700 billion to well over $4 trillion and the debate rages around what we have to show for it. Clearly, the Swiss National Bank saw the writing on the wall and unpegged their currency from the Euro to avoid long-term damage to their domestic economy despite the overnight strengthening of the Swiss Franc and its potential to hurt Swiss exporters.
The uncertainty from central bank actions is starting to be felt around the world and the bond markets are a telling example. The Japanese sovereign yield curve shows the results of decades of interference to try and stimulate growth.
Negative yields out three years on the yield curve demonstrate a lack of growth potential and the Bank of Japan forcing yields into negative territory tells anyone that the Japanese economy, in its fourth recession since 2008, is going to struggle.
By Chris Berry (@cberry1)
To read a PDF version of this note, please click here.
The collapse in the price of copper has been staggering. Swift and immediate, the long, slow downward trend in the price has taken a turn for the worse.
By Chris Berry (@cberry1)
For a PDF of this note, please click here.
“Love and marriage, love and marriage,
Go together like a horse and carriage.
This I tell ya, brother, you can’t have one without the other.”
– Frank Sinatra
Ol’ Blue Eyes Was Right
With structural challenges still facing the metals sector as we head into 2015, finding a way to lower production costs is a must. A company’s sustainability (regardless of where it sits on the value chain) is arguably the most important issue for investors to consider. Lowering costs through either reducing operating or capital expenditures is the most obvious and easiest method, but this doesn’t create lasting value. The key is enhancing productivity through investment. It’s paradoxical to think that increasing investment can lead to lower costs in the long run, but this has been proven again and again many times.
Increased investment implies increased commodity intensity and this is why I used the Frank Sinatra quote above. Productivity goes hand-in-hand with increased investment and commodity use. In other words – you can’t have one (productivity or growth) without the other (increased metals use).
To be sure, there are other ways to drive productivity. In his excellent book Capital in the 21st Century, Thomas Piketty argues that favorable demographics – specifically population growth – can, in part, spur overall economic growth and the productivity gains which go along with it. The challenge here is that it takes decades for this phenomenon to play out.
By Chris Berry (@cberry1)
For a PDF of this note, please click here.
The last constructive note I wrote on the uranium space occurred in March of 2014. My thesis was simple: a glut of excess capacity on world markets coupled with financing challenges for juniors and developers portrayed a sector that, despite the long-term positives, was set to underperform other commodities or indices.
It was time to take profits.
My timing couldn’t have been better with an equal-weighted basket of uranium names I’m tracking falling by almost 38% last year (this doesn’t take into account currency conversions, either, which likely would have hurt returns even more). Until one of several catalysts came into being including the oft-delayed re-start of some Japanese reactors or significantly higher uranium prices, uranium plays were likely best left on a watch list. It was also interesting to note that while the spot price of uranium rose to over $40 per pound in 2014 and a host of geopolitical issues with Russia rose to the fore, the froth didn’t transfer over to uranium equity price appreciation regardless of the market cap.
That said, I believed then and still do now, that a focus on low-cost near-term production stories offered the best way to “play” the uranium sector. While mineral exploration is a totally rational and necessary expense, “discovery holes” aren’t giving investors the returns they’ve become accustomed to in the current market environment and uranium is no exception. My thesis maintained that share price appreciation would come from one of two areas: the aforementioned low-cost near-term production stories or M&A.
By Chris Berry (@cberry1)
For a PDF of this note, please click here.
Of the Energy Metals that I am actively following, lithium stands apart from almost all others as one which I view most positively. The last lithium “boom” from an investor perspective was in 2007 when lithium exploration and development plays rocketed upwards, bolstered by the thinking that an electric vehicle “revolution” was imminent. Obviously, that was premature. EVs of all types (hybrids, plug-ins, etc) are finally starting to gain traction, but any sort of environment where vehicle electrification becomes more than a small percentage of the overall global vehicle fleet is still a ways off.
Paradoxically, I think this is a good thing if you’re an investor in lithium.
My investment case for lithium should be familiar to anyone who has read these notes in recent months, but as a brief refresher, here it is:
Lithium production is an oligopoly. Despite the strong growth rates in lithium demand (estimated at 8% per year), oligopolies do not welcome competition and therefore if you’re a company aspiring to join the ranks of producers, you need some sort of a competitive advantage or strategic relationship which allows you the possibility of achieving the lowest cost of production. The growth rate in demand is key. I can’t think of another metal I am following with such a strong forward looking growth rate – a real rarity when most commodity demand forecasts barely match global GDP forecasts.
By Chris Berry (@cberry1)
For a PDF of this note, click here.
With few exceptions, deflationary forces are likely to challenge growth in much of the world in 2015. With the global economy more tightly integrated than ever before, the risk of much of the world catching a “disinflationary” or deflationary cold is pronounced. Most commodities are trading at or near five year lows, real interest rates negative in various countries, and Central Banks are having difficulty hitting their (admittedly low) inflation targets of 2%. It’s obvious to even the most casual observer that the inflation genie is not even close to being let out of the bottle.
Given that the global economy is generally struggling to generate “escape velocity” growth, the main question is how deflation might spread? I see three transmission mechanisms:
globalization, high debt to GDP ratios, and innovation in technology spurred by R&D.
This note discusses the first two mechanisms with a focus on China’s efforts to halt the “export” of deflation.
By Chris Berry (@cberry1)
To view this entire piece in a PDF, Click here.
“It’s tough to make predictions, especially about the future.”
- Yogi Berra
In the time that I have been writing on the metals markets and global economy, one mainstay has always been reading the tsunami of year end research reports laying out predictions for the year ahead. Almost universally, these well-written and tirelessly researched musings all share one consistent trait: they are almost always off the mark.
Last year at this time, I was reading about the looming interest rate increases in the United States (not even close), Japan finally conquering deflation and returning to growth (fourth recession since 2008), oil prices never falling below $100 per barrel (no comment necessary), the junior mining markets turning higher (I think we’re several years from this) and electric vehicles taking a much larger piece of automotive market share (not yet, but eventually).
I don’t mean to denigrate those who make predictions as it’s a necessary part of portfolio construction. The fact that so many predictions are so spectacularly wrong I think speaks to how interconnected markets are which makes it difficult to anticipate any sort of domino effect.
By Chris Berry (@cberry1)
For a PDF of this note, please click here.
In 2012, Nate Silver, a well known statistician and writer, penned the book “The Signal and The Noise” which discusses using statistics and probabilities to determine real-world outcomes. With volatility in the financial markets on the rise led by a collapsing oil price and plunging emerging market currencies, determining and differentiating the signals from the noise has profound implications for navigating the metals and mining markets as we forge ahead into 2015.
With the price of a barrel of oil (WTI) currently at US $56.05 and widely believed to be headed lower and other commodities including iron ore, silver, copper, and corn under similar relentless pressure, these trends are clear signals and the “noise” they generate is the damage done to investor portfolios.
