Market Perceptions

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Well this should be interesting. The All Ords are trading above 4500 and preparing an attack run on 5000. They haven’t been able to hit that level since April of 2011. But just when you thought it was safe to believe in shares again…whammo!

The ‘whammo’ in question was another report from the dreaded International Monetary Fund (IMF). Yesterday, the Fund warned that Europe’s currency crisis was creating a case of internal capital flight. The ‘extreme fragmentation’ of Europe’s credit markets is due to money fleeing from the dangerous places to the safe places.

You can’t blame money on this one. Unless told otherwise, money likes to go where it’s treated best. It may be sunnier on the Mediterranean coast. But Germany, the Netherlands, and the UK are safer places to have your money than Greece, Italy, and Spain. At least that’s the perception in the markets.

Yesterday’s warning followed the downbeat World Economic Outlook. That wonkish tome introduced the term ‘austerity multiplier’ into the conversation. The IMF concluded that lower government spending would lead, in the short term, to lower GDP growth and higher deficits.

It’s suddenly dawning on a lot of people that there will be no easy way out of a long-term debt problem. You certainly can’t ‘grow’ out of it by borrowing more money. If debt levels were a lot lower, you might be able to grow out of it in enough time. But debt levels are too high now, and time is something not even Ben Bernanke can print more of.

Still, yesterday was kind of like old times, especially when the ASX encountered a glitch that prevented it from publishing price-sensitive announcements from companies that had gone into a trading halt. That was a reminder of the good old days when only the insiders knew the price-sensitive information, and could act on it before the public. These days, there’s a lot more transparency, although even the current reporting leaves a lot to be desired.

Rio Tinto’s Tom Albanese provided a little more transparency about what the company expects from its biggest market, China. Rio reckons China’s economy will grow ‘just below’ 8% this year. That’s slower than the heady days of the ‘Great Industrialisation’. But on the plus side, Rio reckons a lot of low-quality Chinese iron ore producers are closing up shop. This accounts for the rebounding iron ore price, which was up $6 overnight to around $110.

We spend a lot of time thinking about the iron ore price. It’s important to the terms of trade. It drives earnings for Rio and BHP. And the government is banking on it to return the budget to surplus. The iron ore price has a lot of ‘stakeholders’.

One person who’s definitely NOT a stakeholder is Diggers and Drillers editor Alex Cowie. Alex hasn’t tipped a single iron ore stock in recent memory. He says it doesn’t fit his supply/demand criteria. One of his general strategies is to look for commodities where demand is growing but supply — for any number of reasons — can’t keep up. This creates a gap which can push share prices higher for would-be producers.

But don’t take our word for it. Alex took himself down to Port Melbourne earlier this week to record his latest argument. He’s been writing about ‘strategic materials‘ and the companies that find and produce them. If you want to know what he’s talking about, you’ll have to get acquainted with the ‘Blood Battery’.

Regards,

Dan Denning
for The Daily Reckoning Australia

From the Archives…

Derivatives as a Sponge
5-10-2012 – Greg Canavan

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4-10-2012 – Nick Hubble

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3-10-2012 – Nick Hubble

Beer and Tax in Retirement
2-10-2012 – Nick Hubble

Hard Times for Hard Rocks
1-10-2012 – Dan Denning

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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Gregory
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Hi Greg, Highlighting strategic materials as one of the best investment for the future must be investigated deeply. Reasons is that strategic materials like rare earth used in lithium battery do depend on other resources for energy bcos, you will still need to charge the battery. So where would the electricity come from ? I am sure majority comes from gas/oil or coal.

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