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  • A Cascade of Complex Systems: What Does It All Mean for Investors?

    What just happened…?

    April 2020 was a blur of spreading infections, rising fatalities, personal lockdowns, and an utterly devastating economic collapse.

    It’s one thing to follow the headlines and keep up with the news. It’s quite another to comprehend what just happened and the implications for all of us in the months and years to come.

    Even the savviest analysts cannot yet internalise what happened. Wall Street predictions have never been so divergent. Everyday people cannot be blamed for struggling to understand what’s going on.

    If the situation makes your head spin, don’t worry — it should. Nothing like what we’re witnessing has ever happened before. Welcome to a new world.

    Comparisons to the 2008 crisis or even the 1929 stock market crash that started the Great Depression fail to capture the magnitude of the economic damage of COVID-19.

    As Jim Rickards explains below, what we are witnessing is a cascade of complex systems. A pandemic is one complex dynamic system. The economy is another. So, what does it all mean — for investors in particular?

    Until next time,

    Shae Russell Signature

    Shae Russell,
    Editor, The Daily Reckoning Australia


    Welcome to the New Depression

    Shae Russell

    Jim
    Rickards

    The impact of COVID-19 on the global economy is unprecedented.

    In the US, it’s safe to say the economy will not return to normal for years. Some businesses will never return to normal because they’ll be bankrupt before they are even allowed to reopen.

    Before exploring why the economy will take so long to recover (and what this means for investors), allow me to highlight the extent of the economic damage so far.

    The chart below shows the number of jobless claims since 15 March on a state-by-state basis.

    According to Jim Rickards, the recent market crash we’ve witnessed is just the beginning. A total financial collapse might be next. Learn how to protect your savings and investments before it’s too late. Download your free report now.

    As you can see, no part of the country was spared. Even those states with relatively few unemployment claims still had a significant increase. A nationwide pandemic has played out in the form of a nationwide wave of unemployment.



    Port Phillip Publishing

    Source: Bloomberg

    [Click to open in a new window]

    I also want to highlight the importance of small- and medium-sized enterprises (SMEs) to the US economy. Many of these businesses are those we visit every day. They include restaurants, bars, pizza parlours, dry cleaners, hair salons, gift shops, and many others.

    In an economy focused on large, publicly traded corporations and the stock market, the SMEs are often overlooked as economic contributors. That’s a mistake. SMEs make up 44% of total US GDP and 47% of all jobs. In short, SMEs are almost half the US economy.

    This is where many of the job losses, shutdowns, and lost revenues are sourced. This is also the part of the economy that was intended to benefit from the Paycheck Protection Program (PPP) loans.

    US debt now in the same category as Greece

    The US government response to the economic collapse has been unprecedented in size and scope.

    The US has a baseline budget deficit of about US$1 trillion for fiscal year 2020. Congress recently added US$2.2 trillion to that in its first economic bailout bill. A second bailout bill was just passed with an additional US$500 billion in assistance. Another bill is expected in the coming weeks that may add another US$2 trillion to the deficit.

    Combining the baseline deficit, enacted legislation, and anticipated legislation brings the fiscal 2020 deficit to US$5.7 trillion. That’s equal to more than 25% of GDP and will push the US debt-to-GDP ratio to as high as 130% once the lost output ($6 trillion annualised) is taken into account.

    This puts the US in the same category as Greece, Lebanon, and Japan when it comes to the most heavily indebted countries in the world. The previous record debt for the US was about 120% of GDP at the end of the Second World War.

    The Federal Reserve is also printing money at an unprecedented rate. The Fed’s balance sheet is already $6.3 trillion, up from about US$4.5 trillion at the end of QE3 in 2015. The first rescue bill for US$2.2 trillion included $454 billion from a special purpose vehicle (SPV) managed by the US Treasury Department and the Fed.

    Plans have already been announced to use that Fed capacity to buy corporate debt, junk bonds, mortgages, US Treasury notes and municipal bonds, and to make direct corporate loans.

    Once the Fed is done leveraging up its new capital, its balance sheet will reach US$10 trillion.

    So, US$5.7 trillion of new deficit spending and US$5 trillion of new money printing are being thrown at the crisis by the Congress and the Fed.

    When investors should jump back in

    So far we’ve reviewed what is known. What is not known is how quickly the economy will recover.

    Answering that question will determine whether investors should look at jumping back into the stock market or whether they should remain on the sidelines in expectation that the stock market has much further to fall.

    The best evidence indicates that the economy will not recover quickly, and an age of low output, high unemployment, and deflation is upon us.

    Here’s why the economic recovery will not exhibit the ‘pent-up demand’ and other happy talk traits you hear about on TV.

    Jim Rickards warns that a total financial collapse is imminent. Learn how to protect your savings and investments…before it’s too late. Click here now.

    The first reason the economic downturn will persist is the lost income for individuals.

    Unemployment compensation and PPP loans will only scratch the surface of total lost income from layoffs, pay cuts, reduced hours, business failures, and individuals who are not only unemployed but drop out of the workforce entirely.

    In addition to lost wages through layoffs and pay cuts, many other workers will lose contingent pay in the form of tips, bonuses, and commissions.

    Even a fully employed waitress or salesperson cannot collect tips or sales commissions if there are no customers to buy meals, goods and services. This illustrates how the economy is tightly linked, so that problems in one sector quickly spread to other sectors.

    This lost income will eventually spread to the stock market. Individuals who are unemployed or facing reduced incomes are not inclined to buy stocks. They will be too busy just trying to pay the rent, mortgage, car loans, and credit card bills.

    In addition to lost individual income, there is a massive loss of business income. Earnings per share of publicly traded companies will not only decline in the second quarter (and likely the third quarter), but they will be negative.

    Lost business income will be another source of lower stock valuations and a source of dividend cuts. Reduced dividends are also a source of lost income for individual stockholders who rely on dividends to pay for their retirements or medical expenses.

    Unfortunately, this is just the start…stay tuned for more thoughts on the economic fallout of COVID-19 — and what it means for investors. I’ll explain more this Friday.

    All the best,

    Jim Rickards Signature

    Jim Rickards,
    Strategist, The Daily Reckoning Australia

    PS: There’s a reason why financial experts and risk managers use the word ‘contagion’ to describe a financial panic. Remember the 2008 crisis?

    That was triggered by some credit swap dealers by a subsidiary of AIG in a dingy office in London…yet those decisions impacted the global banking system…until the entire world is in the grip of a financial panic, as happened in 2008. Could coronavirus be the final tipping point?

    The post A Cascade of Complex Systems: What Does It All Mean for Investors? appeared first on Daily Reckoning Australia.

    Posted: by Daily Reckoning Australia

  • AUD Slips from 10-Week High, What This Means for the Gold Price

    If you’ve been keeping a close eye on the price of gold during its meteoric rise, then you might have noticed it took a tumble earlier in the week.

    The gold price in AUD terms has fallen 1.83% over the past five days, while it has only lost 0.18% in USD terms.

    AUD Gold Price Chart - Aussie Dollar Gold

    Source: tradingview.com

    This week has been an interesting one for economic developments as countries continue efforts to kickstart their shuttered economies.

    So, let’s take stock of what’s happened and check out the forecasts.

    Discover why the market crash is far from over and the steps you should take now to protect yourself. Claim your free copy of ‘The 2020 Pandemic Market Crash Roadmap’ now.

    What’s up with the Aussie dollar?

    The risk-sensitive Aussie dollar was last at US$0.6561, nearly 1% under the 10-week peak it hit on Tuesday.

    The AUD failed to extend gains beyond US$0.66 and drifted lower as US-China tensions weighed on equity markets, souring demand for risk.

    Diplomatic relations between the two largest economies have soured in recent weeks with President Trump attacking China’s handling of the coronavirus outbreak.

    Tensions have also flared between here in Australia over the government’s role in leading the push for a global inquiry into the origins and spread of the pandemic.

    It appears the AUD has been tracking this sentiment.

    Not all bad news for gold investors — a lower Aussie dollar generally means a higher gold price (in AUD terms).

    AUD Gold Price Chart - Aussie Dollar Gold

    Source: tradingview.com

    Going forward, if trade tensions between the West and China continue to mount and dominate the direction of the Aussie, then we could be in for softer second half outlook.

    What about gold?

    The gold price has been edging higher but has recently met with some resistance.

    Though making up some ground against the Aussie dollar, the USD has slid against a basket of other currencies, shedding about 0.86% over the past five days.

    This has helped buoy the gold price, but there was little movement in US bond yields which continue to generate headwinds.

    Investors were probably waiting for the economic data released by The Federal Reserve yesterday.

    With nothing apart from the expected released, the gold price tracked higher by 0.35% today.

    Gold remains a favourite spot for investors who remain skeptical of the stock market rally’, said Ed Moya, analyst at New York’s OANDA.

    It seems like only a matter of time before gold runs higher as the fundamental backdrop indicates global stimulus efforts will continue to grow and the prospect of negative interest rates for the U.K. and U.S. seem to be growing.’

    Did it cross your mind to invest in gold ahead of further interest rate cuts? Even though the RBA has said it has ‘no appetite’ for negative rates, the UK has placed negative interest rates under review. Australia could follow eventually. Discover our free guide on how to buy and sell gold here.

    Kind regards,

    Lachlann Tierney

    The Daily Reckoning

     

     

    The post AUD Slips from 10-Week High, What This Means for the Gold Price appeared first on Daily Reckoning Australia.

    Posted: by Daily Reckoning Australia

  • Loch Ness Monster Surfaces on Central Bank Balance Sheets

    And you thought Nessie wasn’t real. But now, we finally have proof, right here in this chart:

    Source: The Market Ear

    [Click to open in a new window]

    Do you see the distinctive shape? The humps and the long neck? The fins and the tail?

    Who would’ve thought Nessie has been hiding out at central banks all this time?

    I’ve been to the Nessie museum in Scotland, on the shores of Loch Ness. And the chart above is far scarier than anything they have in their collection.

    The chart shows just how powerful the latest central bank intervention is. It makes 2009 and other interventions since look small. Not to mention also highlighting how the world economy has been on central bank life support for quite some time.

    With QE seemingly unlimited, and more assets than ever being bought up, legally or not, it certainly seems that central bankers will do whatever it takes. Only the German constitutional court judges stand in their way. But have you seen their outfits? It’s no wonder the European Central Bank is ignoring them.

    The real question now is whether you’re a QE believer. Whether you believe monstrous money printing works, or not. Because how you answer that question determines whether you should be in the market, or not.

    If you think money printing leads to an economic nirvana, it’s time to buy stocks. There’s no longer any downside. Central bankers will do whatever it takes to float the market. Even buy stocks themselves.

    If you think money printing has bad consequences…things get a little more complex. But deleting this email and selling out of your stocks is unlikely to be the way to go.

    There’s an underlying problem to the way we’re conducting this analysis, by the way. It’s not like we can agree on what success looks like, right?

    Investors obviously care primarily about investment prices going up. So that’s easy and QE looks fairly successful at doing it. But rising stock prices are not helpful if they’re driven by inflation, not real gains…

    Investment banks seem to think we have no choice but QE anyway: ‘JPMorgan Joins Goldman Saying More QE Needed to Cap Bond Yields’, reports Bloomberg. If bond yields rise now, governments will go bust faster than ever. And that would be worse than…well, it must be worse than a pandemic given we’re risking it in much of the world.

    Of course, investment banks like JPMorgan and Goldman Sachs own a lot of government bonds, so they’re also talking their own book. But in some countries, the entire banking system is at risk if government bond prices crash. So, QE is literally financing governments and keeping the banking system alive at this point. And some consider this to be more important than anything else. Happy times.

    Some argue that QE isn’t a solution, but a temporary measure to buy time. And by that metric, it has been successful too.

    But buy time for what? And if we can’t agree on what, and QE just keeps on buying time indefinitely, where does that lead in the end? Why is it only a short-term measure if it keeps working? And, lastly, wasn’t all this borrowing intended to buy time until the recovery too?

    Or perhaps QE is primarily designed to offset deflation? Deflation and large amounts of debt don’t mix well. It becomes harder to repay the debt you incurred if prices fall. And, in the minds of modern economists, debt and growth seem to be synonymous. And they have a point given modern money is leant into existence.

    If fighting deflation is the goal, QE is doing well too. Britain is going into the worst economic contraction in 300 years, but recent inflation data still came in positive…

    I think there’s a film where the plot involves creating a tsunami in order to counter one? Well, that’s what central bankers are doing. And the size of the wave they’re setting off keeps growing, as you can see in the chart above.

    So, given we can’t agree on QE’s purpose, and we measure success differently, here’s the key to figuring all this out — who is right about QE in the end.

    The answer is nobody. Nobody is right about whether QE is good or bad.

    Economics is about trade-offs. Especially when you’re discussing economic policy.

    Some people believe QE’s inflation would be a great thing. It’d inflate away debt and that would allow us to borrow more. It would also stave off a deflationary crash.

    Others would be in trouble if inflation hits. Savers and bond holders, for example.

    Which means generating inflation is a trade-off. It isn’t inherently good or bad. It’s more of a redistribution of wealth. A well disguised one, by the way, but there nonetheless.

    Keeping companies that would go bust going also disadvantages those companies which were more prudent. And in a world where prudence doesn’t pay, you end up in a right mess over time.

    Financing governments’ imprudent deficits prevents those deficits from correcting and increases future risks. But at least it prevents a meltdown in the short run…

    My point is that whether QE is good or bad depends on the camp you’re in. And I supposed that’s the case with most debates…

    It’s worth pointing out that we don’t know what QE is supposed to do, whether it does that, whether it’s good or bad, nor whether it works. So good luck having an informed discussion about whether to pursue it or not…

    But perhaps figuring out whether QE is good or bad is the wrong way to think about all this anyway. Given QE is set to continue, we should just try to profit from it instead.

    And that’s the good news for today. QE may be tough to figure out, but some of its effects are fairly predictable.

    Until next time,

    Nick Hubble Signature

    Nick Hubble,
    For The Daily Reckoning Australia

    The post Loch Ness Monster Surfaces on Central Bank Balance Sheets appeared first on Daily Reckoning Australia.

    Posted: by Daily Reckoning Australia

  • Negative Gas Prices? It’s a Very Real Possibility 

    It’s been a little over a month now since oil markets shocked the world. 

    In late April, oil futures contracts dipped into the negative. A spectacular implosion that meant oil suppliers would pay you to take their oil. 

    It was as bizarre as it was troubling. 

    A scenario that proved just how damaging this pandemic has been for energy demand. 

    Today though, oil has made a modest recovery. Or, at the very least, it has found a little stability. 

    Prices are still well below their pre-COVID levels, but at least they’re not negative. 

    However, the same can’t be said for natural gas.  

    As Reuters reported at the end of last week, gas prices in Europe are in trouble. And there is a possibility we may see the market follow the exact same fall as oil… 

    Demand disaster

    Just as we saw with oil, the problem lies in demand. 

    Both British and Dutch gas prices are tanking as demand evaporates. A result of lockdowns and everimproving renewables output. 

    If things stay the way they are, the gas market is set for a huge glut. As Reuters notes: 

    Some traders are expecting European gas contracts for near-term delivery to go to zero or even turn negative – which could force sellers to give gas away – following a similar move in the West Texas Intermediate (WTI) oil price last month. 

    That is a scary prospect indeed. And, if it comes to pass, will be yet another obstacle for markets to grapple with. 

    Plus, there is a precedent for negative gas prices. 

    Unlike oil, we have seen the market dip into the red previously. Meaning, it wouldn’t be surprising if it did happen again. 

    Not that that will make it any less disastrous. 

    The implications for gas producers are dire. Because even if some producers wanted to close down their gas fields, the cost will still be great. Decommissioning isn’t an easy or simple process. 

    With the world’s largest gas producer  Qatar Petroleum  refusing to ease up on production too, the outlook is grim. Unless demand picks up soon, gas producers may be in for a whole lot of pain. 

    What does this mean for Aussie gas producers?

    For local players in the sector, such as Woodside Petroleum Ltd [ASX:WPL], this is no doubt a concern. 

    While the problem is largely isolated to Europe for now, there is a chance it could spread. We could end up seeing a huge, global glut of gas. A scenario that would impact producers like Woodside. 

    It will all depend on how long it takes for demand to recover. 

    If the oil market is anything to go by, it may be a while. 

    So, for investors its yet another reason to be cautious. Another sign as to just how far-reaching and lasting the economic impact of this pandemic may be. 

    For this reason, it is crucial that you protect yourself and your wealth. 

    That’s why Jim Rickards insists that now is the time to build a ‘Financial Pandemic Shelter’. A strategy to protect your money from being wiped out by market uncertainty. 

    To learn more about how to defend your capital, check out the full report here. 

    It just might save you from a lot of financial pain. 

    As for gas producers though, it may be too little too late. 

    Regards, 

    Ryan Clarkson-Ledward,
    For The Daily Reckoning Australia 

    The post Negative Gas Prices? It’s a Very Real Possibility  appeared first on Daily Reckoning Australia.

    Posted: by Daily Reckoning Australia

  • Will a New Find Push the Chalice Share Price Past Resistance?

    Earlier this month we noted the rapid rise of the Chalice Gold Mines Ltd [ASX:CHN] share price.

    But things began to cool down a couple of weeks later and the share price seemed to meet some resistance.

    This morning, CHN is up 2.17% or 2.5 cents to trade at $1.175 per share.

    The share price hasn’t been able to break past the $1.27 mark, hovering between $1.265 and $1.095 over the past month.

    With a new announcement out this morning regarding new gold finds at CHN’s Julimar Project, could this be the news needed for the share price to finally breakout?

    High-grade finds, but results mixed

    There was a fair bit to unpack this morning and it may be a couple more days before we see how investors truly interpret these results.

    The short version of CHN’s announcement is that they’ve found consistent high-grade Ni-Cu-PGE mineralisation confirmed over 75m depths.

    CHN announced last week it had begun drilling a new hole to intersect the first drill hole on the Gonneville Intrusive (known as a scissor hole).

    The positive news is that results from the second hole included 75.1m at 6.2g/t palladium, 1.7g/t platinum, 1.7% nickel, 0.7% copper, and 0.10% cobalt from 34.9m.

    While this zone of high-grade mineralisation remains open currently, there could be cause for concern about the continuity of this zone.

    Just an FYI; continuity is desired as it indicates more resources in the ground.

    Electromagnetic modelling of survey data failed to demonstrate a significant conductive response along strike.

    Meaning the southern end of the tenements may not be as prospective as first hoped.

    However, not all mineralisation has a conductive electromagnetic response and does not conclusively rule out continuity.

    To be fair, today’s result doesn’t really tell us much more than we already knew. But it certainly does not rule out the potential of the Julimar Project.

    A marathon not a sprint

    When looking to invest in gold explorers, you need to be prepared to be in it for the long-haul — one-hole wonders don’t come about all that often.

    That being said, there has been a spattering of junior gold explorers seeing some success over the past six months.

    Alkane Resources Ltd [ASX:ALK], Stavely Minerals Ltd [ASX:SVY], and De Grey Mining Ltd [ASX:DEG] along with CHN have all made some significant greenfield discoveries.

    What sets these companies apart from their peers in particular is they are exploring in ‘virgin’ lands, which can add a bit of hype to their share price.

    One of CHN’s drawcards is they are being led by some acclaimed geologists — CHN’s exploration manager Dr Kevin Frost won AMEC’s Prospectors Award in 2009.

    What this leadership knows is that it takes a significant amount of trial and error to uncover the resource.

    I believe today’s results won’t be enough for the CHN share price to push past its current resistance level.

    However, they do hint at some interesting prospects at the Julimar Project.

    If you watch Aussie explorers, developers, or miners closely and you liked the reasoning behind today’s article, make sure to subscribe to The Daily Reckoning Australia, it’s a great way to stay ahead of the curve when it comes to Australian miners. It’s free too. Subscribe here.

    Regards,

    Lachlann Tierney,
    For The Daily Reckoning Australia

    The post Will a New Find Push the Chalice Share Price Past Resistance? appeared first on Daily Reckoning Australia.

    Posted: by Daily Reckoning Australia

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