What You Say, Dr Copper?

US stocks jumped again overnight. Investors are clearly trying to get in ahead of what they think will be some pretty impressive earnings announcements over the next few weeks.

The ‘trade war is bad’ narrative has taken a back seat for now. It’s all ‘the US economy is good’ and earnings will rise off the back of that.

I wonder how long this narrative will last?

While US markets have been strong lately, a narrow focus on them masks weakness you are seeing elsewhere in the world.

As I’ve pointed out in recent weeks, emerging market stocks are breaking lower on the charts. China’s market is down sharply and Hong Kong and Korean markets are also starting to trend lower, after being in a bull market for the best part of two years.

In the US, the ‘junk bond’ index recently traded at its lowest level in two years. Junk bonds are ‘below investment grade’ corporate bonds. When times are good investors pile into this asset class seeking high yields. Times are good now, apparently, but junk bonds are anything but.

Given the focus on yields in this asset class, part of the weakness is due to the rising interest rate cycle. But over the past two months, the yield on US 10-year Treasurys has actually fallen from a peak of 3.11% to 2.87%.

That tells you the bond market isn’t getting too carried away with the ‘US economy is good’ narrative. It sees corporate earnings as getting close to a cyclical peak.

And neither is Dr Copper. As the old saying goes, copper has a PhD in economics. It can predict global economic cycles as well as anyone. In the past month, copper is down 15%. As you can see in the chart below, it tried to rally to new highs in early June, but topped out at the same level as the late December, 2017 high.

MoneyMorning 11-07-18

Source: Optuma
[Click to open new window]

Is a global recession coming?

This doesn’t mean a global recession is coming, of course. But it’s not exactly a sign of global economic strength, is it? Somewhere in the world is cooling. And if it’s not the US, then it’s probably China.

As The Australian reports, it may have something to do with the Chinese government’s intention to reduce the risks from the rapid build-up of debt in the economy over the past decade.

In a speech on the Chinese economy in May, RBA governor Philip Lowe pointed out how non-financial sector debt as a percentage of GDP rose from about 100 per cent in 1997 to 150 per cent in 2009, and then skyrocketed to more than 250 per cent last year.

Since then, the impact of the government crackdown on non-bank lending in China has become more apparent in slowing infrastructure and construction projects and dampening economic growth.

In a paper released this week, ANZ’s economist for greater China, Raymond Yeung, notes that the “taming” of the shadow banking sector is causing liquidity constraints in the Chinese ­economy.

“Chinese policymakers are ­determined to continue financial deleveraging,” Yeung says.

“In May we saw the largest monthly contraction in shadow lending activity since data was available.

“The share of these activities has reached a record low since the end of 2012.”

According to Reuters, China accounts for nearly half of global copper demand. So if the government is trying to put the brakes on, then it’s clearly going to have an impact on the price of the red metal.

And if copper is feeling the pinch from a slowing China, then so will other commodities, like iron ore.

Which brings me to the Aussie market. For the past few months, Aussie stocks have been on a tear. Resource majors and the banks have performed strongly. That’s despite China tapping on the brakes and despite falls in the property market.

Who would’ve predicted a rally in Aussie stocks under such circumstances?

Not many. Which is why predicting is pointless. Yet we love a good prediction. And the more a prediction conforms to our inbuilt bias, the better. In markets, as in life, we see what we want to see. It’s only in hindsight that we see what was really there…and sometimes not even then!

There are none so blind…

If you want to get better at this investment game, you need to stop having opinions. Because opinions don’t matter. If you have one, be prepared to change it. Quickly.

The market isn’t a moral arbiter. It doesn’t reward ‘right’ over ‘wrong’. The market just is. It’s the product of billions of decisions — both rational and irrational — made daily. Trying to make sense of it is a fools’ errand.

Yet we give it a crack each day. The only thing that gives me a slither of confidence is that I know that I don’t know. That’s the most important information an investor can have.


Greg Canavan,
Editor, Crisis & Opportunity

PS: Eight Simple Steps to Invest Like Billionaire Warren Buffett… Get the steps now (free).

Greg Canavan is a Feature Editor at Money Morning and Head of Research at Fat Tail Investment Research.

He likes to promote a seemingly weird investment philosophy based on the old adage that ‘ignorance is bliss’.

That is, investing in the Information Age means you have all the information you need at your fingertips. But how useful is this information? Much of it is noise and serves to confuse, rather than inform, investors.

And, through the process of confirmation bias, you tend to read what you already agree with. As a result, you often only think you know that you know what is going on. But, the fact is, you really don’t know. No one does. The world is far too complex to understand.

When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases.

Greg puts this philosophy into action as the Editor of Crisis & Opportunity. As the name suggests, Greg sees opportunity in a crisis. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines traditional valuation techniques with charting analysis.

Read correctly, a chart contains all the information you need. It contains no opinions or emotion. Combine that with traditional stock analysis and you have a robust stock-selection strategy.

With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the basic, costly mistakes that most private investors do every time they buy a stock.

To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Money Morning here.

And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here.

Official websites and financial e-letters Greg writes for:

Money Morning Australia