Geopolitical Shinboner of the Century


–What a weird old world it is when U.S. economic strength leads to a weaker U.S. dollar and investors taking on more risk. It’s a crazy, mixed up world where financial markets aren’t signalling accurate prices anymore. That’s the kind of world we invest in.

— But in Orwellian fashion, weakness becomes strength in the era of competitive currency devaluations. The greenback is down against the Aussie on a strong U.S. retail sales report. And this is supposed to be the underlying good news in the U.S. The festive season (some dare call it Christmas) is the chance for Americans to engage in nostalgia-driven binge purchases of cheap consumer electronics and textiles made in China.

–For a day or two, it can be just like in the good old days, before the nation went bankrupt and the fractional reserve banking system was exposed as Ponzi scheme built on the belief in the full faith and credit of a private cartel of bankers. The fact that the Dow has reached a two-year high tells you how decoupled from fiscal and economic reality financial markets are.

–But what about here in Australia? The Super profits tax debate has shifted to the banks. A bland-sounding Institute has told the Senate to steal from the rich and give to the poor. The rich, in this case, are the banks. Why steal from the banks? Because that’s where the money is!

— This shows you that the real motive behind the Mineral Resource Rent Tax wasn’t to distribute the proceeds of the resource boom more “fairly” (whatever that means), but to plug a whole in the budget of a government that’s taken Australia down the road to a long-term fiscal deficit.

–The problem with the banks isn’t that they make too much money. It’s that they take so much risk with other’s people money to do it. When they take those risks with other people’s money, the government then steps into to bail out the banks with your money. That’s the broken system we have now.

–What’s worse is that the banks’ risk-taking is subsidised with low interest rates. And lately, it’s subsidised with loans made by the Federal Reserve collateralised by nothing more than a portfolio of stocks. Before the GFC, if you wanted a loan from the Fed you had to post some real collateral in exchange.

–But with the invention of the Primary Dealers Credit Facility, Wall Street and other money-centre banks could pawn their junk assets at the Fed in exchange for some hot new cash to invest…back in the equity market! This is how you get the Dow at a two-year high and copper making all time highs.

–What did you have to do to get a loan from the Fed in 2008? Just ask. It’s the central banking equivalent  of a sub-prime loan.

–By the way, while we’re on the subject of JP Morgan, a Reuter’s story reports that, ” data from the London Metal Exchange showed that a single entity had increased its control over warehouse copper stocks and cash contracts to more than 90 percent, up from a 50-80 percent holding reported for the past several weeks.”

–Come again?

–A single entity controlling that large a position in copper warrants? That seems pretty large. For all we know, that could be normal in the commodity futures business. It does seem pretty abnormal though, doesn’t it?

–As we related last week, there’s speculation that JP Morgan is on the end of a massive naked position in silver. So maybe it’s a kind of pair trade. Long the entire copper market. Short the entire sliver market (or more than three times the silver market, to be exact).

–We even read one reader comment that JP Morgan is being used as a weapon in the total-economic-warfare low-grade currency death match between China and America. The thinking goes that using Fed money, a trader could corner a commodity, drive its price up, and inflict a mortal wound on a major consumer of that industrial metal (China and copper, respectively).

–There could also be a perfectly normal explanation for all of it. But since we’ve been following copper’s relentless ascent to new highs, it made sense this morning to look at which of the two Australian miners most closely tracks the red metal. If copper prices fall, which of the big two might fall with it the most?

–The chart below shows continuous copper futures prices over the last three years. That’s the black line. The orange line below is Rio Tinto’s US-listed American Depository Receipt (ADR) over the same time. And the red-line above is BHP Billiton’s US-listed ADR. You can see that since the great reflation of 2009, BHP has left Rio in the red dust and tracked copper.

Dr. Copper and the Big Two Miners


–This is a bit surprising. Why? BHP is not just an iron ore play. And of course, iron ore is not copper. We are equating them both as industrial metals and proxies for China’s growth (high fixed asset investment, which is metals intensive). BHP also has uranium, and oil, and diversified portfolio of global resource assets.

–Yet it’s been tracking copper. At the very least, this tells you investors in the US view BHP as a China proxy. And Rio?

–Rio’s thwarted merger with Chinalco and its thwarted iron ore partnership with BHP, not to mention the billion in debt it took on from the Alcan acquisition just before the top of the market—all of these explain its laggard status relative to copper and BHP.

–In case you were wondering if the time-scale might have been conjured to suit the conclusion we wanted to make (we didn’t have a conclusion in mind, by the way), take a look at the chart below. It goes back to when the commodity boom really first got under way in late 1999 and early 2000. It shows more or less the same thing—since 20009 BHP has tracked copper and Rio has lagged them both.

A decade of metals bullishness


–Does this tell you that BHP is better run than Rio? Or does it tell you something even more useful? Namely that copper and the miners have ridden the reflation rally to new highs. But where to from here?

–The yield on the ten-year U.S. note moved up to 3.46% yesterday. It was the highest level since May. Thirty-year yields moved up too. Why does this matter if you’re an Australian investor?

–If the US bond bubble is popping (and it’s been inflating for 30-years) it could mean a big asset allocation migration is on. It would take investors out of fixed income and dollar denominated assets and into equities and especially tangible asset equities. The exodus out of dollar-denominated assets would be bearish for the dollar and thus bullish for the Aussie and commodities.

–All of this sounds like a compelling argument for higher highs on Aussie mining stocks. In fact the only thing that could disrupt that conclusion is a massive China crash…or some other kind of huge, unanticipated crisis that makes the U.S. dollar attractive as a “risk off” asset.

–And speaking of Julian Assange, we were pleased to learn this week that he’s reportedly a paid up North Melbourne member. If you’re not in Victoria or in to Australian Rules Football, that means he’s a ticket-holder for the North Melbourne Kangaroos of the AFL (as your editor is).

–That makes him a stand-up man in our book. The ‘Roo boys all have the “Shinboner Spirit.” The phrase derives, we think, from back when all the abattoirs were in North Melbourne. The Shinboner spirit is a kind of an honest, dedicated, worth ethic and a sense of camaraderie in the face of a challenge and the general gristle of life.

–What is life if not a constant series of incidents where you metaphorically bang your shins against something but fight on anyway? North Melbourne members, we think, understand philosophically (or in some natural and intuitive way) that life is basically unfair, but that’s okay. Get on with it.

–John Adams, America’s second President, was a Shinboner. He once said to his wife, “We can’t insure success, but we can deserve it.” We like to think he was talking about more than America’s Revolution against the British. He was talking about life, where the only thing you really control on any given day is the quality of your effort, not its ultimate outcome.

–Work hard. Don’t take what’s not yours. Do what you say you’ll do. Never give up. This, we like to think, is basic Shinboner Orthodoxy (also, go hard at the ball).

–What does that have to do with Wikileaks front man Julian Assange? Well, he can’t hide behind the 1st amendment and the freedom of the press or freedom of speech. He’s an Australian, not an American. Australia doesn’t even formally (constitutionally) protect the right to free speech. And even in America, it has its legal limits.

–But the real issue with Assange and his attack on the State is whether there are some secrets that really should be secret and kept from the public during the legitimate conducting of the People’s business (whatever that is).

–What’s surprising about most of the diplomatic cables leaked so far by Wikileaks is how mundane they are. They’ve actually restored some of the credibility to American diplomats, who are quoted saying obvious and fairly accurate things about public officials in other countries. The real embarrassment is that America can’t seem to keep its own secrets (unless it wanted these things made public and Assange is a CIA agent).

–But more seriously, does the government have a legitimate reason for keeping some secrets? Probably so, when it’s doing what it’s supposed to do (defend the borders etc). But when a group like the Fed hides behind the “secrets” argument for not disclosing how it loaned $3.3 trillion dollars to various international organisations, you can see what  the “secrets” argument really is: an attempt conceal official incompetence and fraud from the public and cover up big mistakes.

–A less ambitious Federal government would have fewer chances to screw up and would thus have less to hide from the public. No one really minds if the dog catcher can’t do his job. But if the Army can’t do its job invading another country, it’s a whole other story.

–So we’re all for Assange. He’s a geopolitical Shinboner with a modem and he’s not afraid to use it. And we note he didn’t cop any real flack from the authorities until a Forbes article was published in which he threatened to lift the lid on how major banks operate. We can’t have that, can we? Keep on trying Julian. All you can do is deserve to succeed.

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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5 years 10 months ago

Look at this baby go – 1 AUD = 1.3354 NZD

Westpac NZ just suspended dividend payments to “shore up its capital position” in past days.

If it is like this on 31 Dec balance date there are going to be reporting issues even if the dopes at APRA keep pretending that they can’t see it.

Watch for the RBA to make a big “rebalancing” move on the kiwi between xmas and new year. The 4 pillars are up to their necks in it again.

Chris in IT
Chris in IT
5 years 10 months ago

It’s odd that JPM would go long on copper and short on silver given they very same mines produce both. Silver is a by product of Copper production.

Copper and Silver as a pair trade in theory should be a mean reversion arb trade. They are ding the opposite? The expect greater deviation from the current ratio?

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