August, and Everything After

–Before we get into this week’s first episode of “As the U.S. Dollar disintegrates” we should point out that some people are go about the business of making money in almost any conditions. Last week we read a draft version of Dr. Alex Cowie’s latest investment recommendation in Diggers and Drillers.

–He was writing about the “micro-cap” of base metals. Huh?

–Tin! Tin is a small market, in terms of annual sales and volume, compared to say, that big shot Dr. Copper. But Alex pointed out that the supply chain for tin was tight. Even in generally bleak economic conditions, you could still see the metal rise.

–And so it has. Today’s wires report that, “LME cash tin moved to a premium over the three-month price, going into backwardation for the first time in more than eight months. The backwardation suggests looming tightness in supply, although tin is a relatively illiquid market and is the smallest on the LME.” There is also this report from Mineweb that Indonesian tin output may fall by 20% due to heavy rains. Indonesia is the world’s largest exporter of tin.

–Backwardation, by the way, means that near-term futures prices are a lot higher than longer-term futures prices. If you had a supply bottleneck, near-term prices would spike. That’s not the reason Alex recommended an Aussie tin producer. The best reason, in our opinion, is that it’s a low cost producer thanks to great management and a great resource.

–You can read Alex’s whole Diggers and Drillers story in the August issue. Mind you, your editor is not entirely convinced that buying base metals in the current environment is a great idea. But Alex has been knocking them out of the park. And with respect to what we think is the biggest threat to Australia’s continued resource propserity – China – Alex had this to say in his Friday update to Diggers and Drillers readers:

I am probably the odd-one-out in the office, in that I am cautiously optimistic about China. This is a subject that could fill another few newsletters at least, and I won’t attempt to even begin to round it up here today. Let’s just say that that if an economy slows from 12% growth to 8% growth, it is really only coming down from sixth gear to fifth gear.

This is still fast growth by anyone’s standards. China is fraught with inequalities, dodgy deals, and questionably efficient markets, agreed. Yet there are still 1.3 billion people hell bent on industrialising, and that will generate economic growth (as well as demand for resources) for years. China’s economic growth certainly won’t take a straight line in coming decades, but it will be a line that goes up.

The communist core of the economic model does mean that it can respond aggressively to changing market conditions. It is now diverting its reliance on the debt-straddled US-consumer, and focusing its future growth plans on the Chinese consumer. This is a radical change that will take years, but is already taking place. In the meantime this week’s figures also pointed out that China is currently making plenty of money sending most of its exports to other emerging economies. China is doing just fine.

–Well, according to today’s Wall Street Journal, China, at least in terms of output, has eclipsed Japan to become the world’s second-largest economy:

China is expected to surpass Japan this year as the world’s second-largest economy, an unprecedented position for a still-developing country and one that has brought strains as well as triumphs.

Second-quarter GDP figures from Japan reported Monday morning show that its economic output, at $1.288 trillion, fell short of the $1.339 trillion China reported for the three months ended in June.

That suggests that China is likely to pass Japan once and for all this year. China’s output has topped Japan’s before, in the last quarter of the year, when the Chinese economy tends to run hotter for seasonal reasons. Outpacing Japan in an early quarter is seen as a good indication that China has the momentum to zip past Japan for the full year.

–Hmm. Does this mean Alex is right and we are wrong about China? We’ll see. One of the virtues of having an office full of independent thinkers is that you don’t get groupthink. People often disagree. Ultimately, we have no idea of what the future holds. We try to get a bunch of hard working people producing their best investment ideas and they let you decide how to fit them into your own financial plan.

–Speaking modestly, though, we’re sure we’re right about China. Its massive industrialisation was accelerated by the great credit bubble. As the bubble bursts and deflates, surplus and inefficient Chinese production will be idled or shuttered, as began to happen last week. Of course China has a real advantage in certain manufacturing industries, like those requiring rare earth elements.

–But the daily speculation about the economy and stock prices can lull you into a false sense of security that things are normal. They continue to be abnormal, and very dangerous. August – probably because it’s when many folks in the Northern hemisphere get back from summer vacation – tends to be the month where big bear moves begin. And we’re in a big bear that’s enjoyed a minor bullish up-trend.

–For the rest of this week we’ll look at whey deflation may give way to default and why honest money never lies. Until then…

Dan Denning
for Markets and Money

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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