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Author, Andrew Sheldon

Global Mining Investing is a reference eBook to teach investors how to think and act as investors with a underlying theme of managing risk. The book touches on a huge amount of content which heavily relies on knowledge that can only be obtained through experience...The text was engaging, as I knew the valuable outcome was to be a better thinker and investor.

While some books (such as Coulson’s An Insider’s Guide to the Mining Sector) focus on one particular commodity this book (Global Mining Investing) attempts (and does well) to cover all types of mining and commodities.

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Monday, September 28, 2015

The US & Chinese equity market outlook for late 2015 into 2016

In my last post on 18th August 2015 I forecast that the US and China were destined to enter recession. The reason for saying so is the subject of this article, however it needs to be acknowledged that the recession is destined to be 'short-lived', or simply a 'crisis of confidence'. There is no reason to expect mass employment, or foreclosures. The problem will simply be an absence of spending and falling asset prices. The reason for the falling prices will simply be:

  1. The inability of the Fed to convince the investing public that there is destined to be a recovery soon
  2. The fact that the market thinks asset prices are over-priced
  3. The difficulty of resorting to more stimulus at this time - again - given that the first stimulus didn't fix what ails the economy
  4. The fact the equity/property boom have been long-winded - worthy of a break
Having wrote that article, the US and Chinese markets collapsed. Now we are at a point where the Chinese and US markets are about to turn - the question is - which way? The fact is that there is hardly any recognition that the US is at a weak point. US business inventories are weak, confidence is poor. No one is spending money, and Obama wants to look good. Are we going to see any big spending initiatives at this point? I don't think so. He cannot serve another term, so we can expect that it could only be a new president who would do that. We can therefore expect confidence to be poor until the middle of next year. That's effectively at least a short 9-month recession. Mind you, given the US people appear set to elect a maverick, then you might conclude that is reason for more investor 'unease'. It is nevertheless good to see. It is however destabilising. 

Look at this chart - this is what the Chinese market is about to do - fall to 2500 points. I show in the first chart that 2500pts is support. This is not a crisis market, so its not going to 2000pts in my opinion. You can see the flag structure in the 2nd chart below. 

The US market however is the more important market. It is overpriced because of the very low prevailing interest rates. Interest rates are not going to rise; asset prices are going to fall, and that will scare some people, having fallen already. The US Dow Jones is going to 14,000 pts, as you can see in the following graphic.


















As you can see the market is already half way to its support level of 14,000pts. In fact, I think it will find more support at 15,000pts, and finally at 14,000pts. We can probably count on a Xmas rally, and then a March-May 2016 sell-off as the election looms in November 2016. The implication is that after the recovery off the 14,000pt support, 2016 is going to be a very flat year for equities. Its hard to say with 2017 given that it will depend on the capacity of the leader to build a consensus.


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Monday, August 24, 2015

Outlook for China's equity markets

The Shanghai Composite index appears to be in a free-fall. I have just signed off on an article on our sister website 'Critical Media Group', where I describe the outlook for Chinese equity markets.

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Tuesday, August 18, 2015

The prospects of global recession heightened in the Dec-2015 quarter

The Dow Jones is coming under pressure at a time when market pundits are being told to expect a market recovery. What's new? There have been numerous opportunities for equity markets to go into a tailspin, but on each occasion asset prices (equities, property and bonds) have tended to rise. The elusive recovery to date could be attributed to:
  • The strong equity markets
  • The housing market recovery
  • Low unemployment
  • Low interest rates
The problem of course is that these indicators are not convincing for the following reasons. Basically there is little economic activity going on in Western economics, and that is even undermining growth in the emerging markets that rely on their exports to the West. 

Equity markets

The following chart shows that the Dow Jones is close to challenging its support levels. It has of course been sold off before, only to recover...So we might ask what is different this time?
DJ Industrial Technical Analysis Chart | 4-Traders
Source: 4-Traders.com

The problem is apparent in the following chart. The market has had a huge 'unprecedented' rally in terms of its longevity. Even if you were positive about the outlook, you might question the sustainability of this rally, given the expectation of rising rates. Looking at the following chart it seems reasonable to expect a 'good retracement' to at least the 14,000pts level. The reason why we might not expect more than that is simply that, there is every reason to expect a recovery in the real economy because:

  1. Interest rates remain very low - so there is scope for the market to accept some increase in rates
  2. Higher rates would actually encourage more spending because the incentive to pay off one's liabilities will be lower. The problem is that the Fed would not raise rates if there was any prospect of sinking equity & property markets. 
  3. There are no signs of inflation

















Source: Google Finance

Based on the chart above, there is good reason to expect a 'sell-off' in Sept-2015 on the prospect of rising rates, but also for other reasons:

  1. The 'dead-cat' bounce in China's equity markets, suggests a lack of confidence there
  2. Ominous signs of political instability in the USA, with elections looming in 2016
  3. The prospects of a currency war, that can only undermine confidence in political leaders. This is the surest sign of no demand. 

Housing market recovery

Judging by the following chart of new housing starts in the US, you could be forgiven for thinking the strong growth in construction is a 'good sign'. The reality is however is that:
  • Current levels of housing construction only offset the 'pent-up demand' for new housing that arose after the global financial crisis. 
  • There is no 'fundamentals' which would support the persistence of this trend, as I will show next.
















Source: Federal Reserve

Looking at this chart and the absence of fundamentals to support it, it is easy to conclude that the USA is about to enter another recession, and that housing starts are destined to dip down soon. Might the Fed arrest this prospect with another QE program. The problem is the lack of jobs to justify it. You can put credit into the banking sector, but in the absence of 'real spending', it will just end up in already over-priced asset markets. If the Fed resorts to QE, it would probably also raise rates, and prompt more liquidity to enter the derivatives market 'short'. That would not help confidence in the real economy.

Low unemployment myth

The myth is being perpetuated that the unemployment rate is low, and that it has fallen over the last 7 years since the global financial crisis. In fact, we have simply seen a lot of Americans, as in other countries, live off their equity, and simply stop looking for work. I'm way ahead of these people because I left the workforce 15 years ago to simply live off investments. I was motivated by the decline in Western values; but others were mostly motivated by the decline in opportunities, i.e. retrenchments. The problem of course is that we have four types of people in the market place:
  1. Families spending like there is no tomorrow because they have kids and little savings
  2. Subsistence lifestylers living frugally - mostly these are skilled people leaving themselves flexible
  3. Subsistence welfare recipients - mostly these are 'estranged' unskilled people, or skilled people in vocations that society does not value. Sometimes they are just people who don't readily integrate into society, i.e. libertarians, white supremacists, atheists, disabled or convicted felons for drug use. 
  4. Skilled people who have seen a rapid rise in incomes - Even these people are not spending because they are rapidly paying off their homes
You can see from this 'anecdotal survey' of Americans that the only people spending are working families; whilst everyone else in 'economizing', whether because they are struggling, cautious or opportunistically paying down debt on their significant liabilities. This explains why spending is subdued, and why it will not increase until:
  • There is a recovery in the 'real economy to justify a rise in interest rates by over 100bp beyond Sept-2015
  • Quantitative easing in order to stimulate the US market

I am actually expecting the Fed to pursue both of these courses of action. So-called reference to a 'liquidity crunch' is nonsense. The reality is that there is a 'wage gap' between Western society and Emerging Markets. This will take time to resolve, however Western governments have done the exact opposite of what they need to have done in order to solve the problem. Far from increasing productivity, they have reduced it. Far from reducing waste; they have taken it to new levels with more intrusive 'distortionary' laws. This is why I support Donald Trump. He's not a political hack, he talks about reducing waste, and unlike Rand Paul, he resonates like a conservative, so he is plausibly electable.

It is therefore important to appreciate that 'low unemployment' is a 'dirty white lie' that is in fact a long term decline in the US workforce participation. You could argue that too many people have simply left the workforce, or 2-income families have become one, or full-time workers have become part-time, that more children are staying at home until their 50s, or more people are packing into ever-smaller apartments. Of course there are more Americans on welfare programs. But the greater reality is that they are simply living minimalist lives. This is actually one of the reasons why governments have shifted to taxing consumption, as well as expanding their powers to intrude into foreign bank accounts, as more people 'live abroad'.


Source: US Bureau of Labor Statistics

Why would this rate be falling if unemployment is falling. People have simply stopped looking for work. Not everyone of course. It is also fair to say that a lot of people are 'under-employed'.

Excess business inventories

There are however also other 'demand indicators' that are used to justify the premise that the US economy is recovering, such as new vehicle sales, which are at "record levels". There is other evidence however to suggest that not all is well in the US economy, namely:
  • US inventory levels - see the ominous signs of recession below
  • Vehicles in the US are a 'necessity' unlike Japan. The issue is not 'car ownership' but car cost. Moreover the credit terms for new cars have never been easier, and anyway delaying the purchase has a reason to jump into the market....they have been saving for 7 years.
  • Judging by the statistics belong, vehicle sales are at 'break-neck' rates, so I'd expect a fall in coming months.
Source: Trading View & Federal Reserve; trend analysis by Andrew Sheldon







Source: US Bureau of Economic Analysis & Federal Reserve of St Louis

In conclusion, there are strong reasons to be cautious about the outlook for the next few years. There are also compelling reasons to appreciate that the current crop of conservative and democratic politicians have no intent to reform goverrnment. Only politicians like Rand Paul and Donald Trump are likely to make those tough decisions to cut costs, that will restore the US economy to health. Note the following:

  • Stock and bond prices - the tendency for stock indices to fall every 7 years (2001, 2008 and now 2015??)
  • Excess inventory levels - a precursor to recession
  • Prospect of a modest interest rate increase - not so significant as only 25bp probable
  • Election concerns diminishing confidence in the next year

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Investment Strategy

If you are investing for the long term, you still need an investment strategy. Dont be fooled by the rhetoric of fund managers. The reason they advise you to 'buy & hold' is because they dont want to compete with you in sell-offs. Markets and industrial sectors are cyclical, so they demand trading to get the best returns. Fund managers actually cant hope to match the performance of small investors (if you are half good) because they have to manage huge amounts of funds and charge you a fee besides.
MY ADVICE is (i) look at a range of market indices and decide upon what level of correction would give you the justification you need to get in & out of the market. It might be a 5-10% retracement or a break of trend. (ii) Diversify if you dont have an intimate knowledge of the company or management. More than 30% in one company is aggressive.

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