Move Along, nothing to see

June 17, 2023 by

Simon Phillips in Blog

“Chase after money and security and your heart will never unclench. Care about other people’s approval and you will be their prisoner. Do your work, then step back. The only path to serenity.” – Lao Tzu

Serious disclaimer upfront: personal serenity, peace between the ears and any existing meditative state maintenance is your own responsibility and may be ruined by these notes which is no responsibility of the author, only your own.

Not to worry too soon, the financial reality right now is; the bubble of everything is still a go!

But trust the Kiwis to threaten this bubble with a pin this week, talk of recession and all. They really are a bit slow when it comes to “getting in front of it”, and “controlling the narrative”. They probably think inflation is running hot as well, do they not know to remove any line item that makes it look a bit hot!

The Reserve Bank of Australia has no such concerns and certainly wants to see blood in the banks before it’s inflation “fight” is over, another 0.25% rate rise last week (fully passed on) will almost certainly be viewed as the straw that broke the over indebted back this time around.

The narrative around Australian household kitchen tables is certainly not one of under control inflation or household costs. Then they add a doubling or trebling of mortgage repayments over the last year and a bit. Talk about double whammied!!

As we’ve prognosticated for several quarters now, stagflation (rising inflation, falling growth) is our base case for the global economy, not just Australia. It’s unfortunate that inflation is such a hideous tax on the people that can least afford it.

Unfortunate because central planners will do anything to convince their constituents that it’s not happening. There is no greater life force for politicians and bureaucrats than self-preservation. History is littered with examples, when a government over promises and over commits for long enough they will always, always choose inflation over any type of reform or austerity. This, my fellow investors, is baked in the cake and luck will favour the prepared.

But before we share any useful wisdom, what do the circa 30,000 people employed by the US Federal reserve actually do anyway? Soon their job will be even more simple, print more USD’s and buy USD treasuries. This type of printing has worked without problem in Euroland and Japan for many years, right? It’s certainly worth a try.

The good news is, this “Yield Curve Control” (YCC) probably won’t occur before rates come down. Rates won’t come down until mainstream media has convinced their populations that rates are not coming down!! The everything bubble could still have a way to play, or start with a mis step tomorrow! Financial Reform in the West was never an option, just climate change.

From an average investors point of view, hope is probably not the best asset protection solution to the lunatic central bank behaviours since 2008/09. One cannot anymore rely on simple things like laws of nature or universal karma.

So, June is usually the month that we acknowledge the existence of the “In Gold We Trust” publication from the team at Incrementum Capital, led by the indomitable Ronnie Stoferle and Mark Valek. We’re truly thankful for the authors openness in allowing us to reference the excellent charts below. A credit to the confidence they have in their own intellectual ability.

Let’s start with, This time is different:

Before we move on to the most unloved, under owned but systemically important asset in the world we’d like to acknowledge a couple of other possible investment destinations of choice, other than Lithium.

Copper

According to a recent McKinsey study, copper demand will rise to 36mn tons by 2031.
Under extremely optimistic assumptions, production could be expanded from 21.8mn to 30mn tons over the same period.
Even under the most favourable conditions, the deficit will be substantial, at 6mn tons +.
To achieve net zero (cough cough) the world would need 54% additional copper by 2030.
According to analyst Guy Wolf, the price of copper would have to near US 15 000 per ton to provide incentive to develop new copper projects.
Such extreme shortages are not just limited to Lithium and Copper but also Nickel and Silver.
If Governments remain committed to current climate goals watch for an extreme state financed cap ex explosion in response.
One more comment, from the Aurum Echo, just imagine what might happen to silver if it ever returned as a monetary metal, or any other systemically important metals for that matter.

Emerging Markets

Abandon Ship or double down.
Which will be the best market to invest in the next 12 months.

Now, onto one of the few non bubbles in the investment universe. Gold.

Recently, we enjoined some rare macro commentary from an Australian Gold producer, hats off to Evolution Mining’s Jake Klien. He was not wrong in his reference to 5d’s.

Debt defaults: US interest rate hikes (and elsewhere) are clearly causing stress in the financial system. In the last couple of months three US banks had to be rescued. In terms of scale, they were bigger than all of the banks that failed in the GFC.

Debt ceiling: While the issue was resolved, it needs to be remembered that US debt stands at $US31 trillion and is growing by $US100m an hour. Klein said the country’s finances are on increasingly precarious ground.

Dedollarisation: Not sure it is a real word. It goes to the US dollar’s status as the world’s reserve currency.

“We are entering the early stages of what has been a Chinese government ambition for the last 25 years – a formidable challenge to the US dollar,’’ Klein said.

Other countries (think Russia among others) harbour the same ambition.

“The US dollar is under attack and that is not going away – and it will reshape financial markets of the future.’’

Destabilisation/Decarbonisation: Countries, customers and consumers around the world are at the start of a massive wave of spending to make decarbonisation happen. It is essentially an arms race with a $US125 trillion bill which will only add to the inflationary pressures around the globe.

Enter some supporting charts of note: