What is there to say? Yesterday was another rotten day for Aussie stocks.
In recent weeks we’ve seen more of those than we care to see.
Almost everything is in the red — resources stocks, banks, and even the retailers, which had such a good time of it only the day before.
It says something that of the top 10 biggest movers on the ASX yesterday, not one of them has a share price greater than three cents:
Source: CMC Markets Stockbroking
Gains of 50% all the way up to 200% in these tiny stocks, in a single day.
That gives me an idea. More soon.
Russian real estate
Last year, I told you that oil was the most important commodity to watch. That was before the oil price crashed.
Nine months later and nothing has changed.
It’s still the most important commodity to watch. After sinking to a low of US$42 in March, it has rebounded to now trade at US$60.
That’s a 43% rebound.
Many in the mainstream made the mistake of thinking that oil was about to collapse to US$10 per barrel.
I wasn’t convinced that would happen. My view was that the oil price would consolidate somewhere around the US$50 level. Of course, that’s below the current price level, so the recent oil price strength does surprise me a little — but not a lot.
The oil price action is all too familiar. Prices always overshoot. Naturally, you never know how much it will overshoot until after the fact.
When it does, the price will typically rebound and then settle at a new level. That’s not uncommon. It happened with stocks in 2008 and 2009. Prices crashed, rebounded, and then settled into a sideways range for a few months.
The gold price is doing something similar from the other side. It soared into a peak in 2011. It then took two years for the price to slump. Since mid-2013, the price has traded in a fairly predictable sideways range.
So now, if I were a betting man, I would change my price range for the oil price. I would guess it’s more likely to trade in a range above US$55–60 rather than around US$50.
Remember what the oil story is all about. The oil price crash was about Saudi Arabia re-exerting its power and influence over the oil price. After years of oil trading around US$100, and new technology boosting the US oil industry, the Saudis needed to make sure the world knew who was in charge.
Some have even argued that the price crash was actually due to a US and Saudi conspiracy to drive Russian oil producers out of business.
Remember that Russia, not Saudi Arabia, is the world’s biggest oil producer. If you think the Aussie economy relies on resources exports, oil comprised over half of Russia’s exports in 2014.
So when the price of oil collapses in half, it effectively wipes out a quarter of Russia’s export revenue. So, it’s a big deal.
What impact did that have on Russian stocks?
They went up…in Russian ruble terms:
Source: Google Finance
But that 22.7% gain in Russia’s MICEX index is counteracted by a 28.9% drop in the ruble over the same timeframe:
Source: Google Finance
That’s the impact of commodity and currency wars for you. (By the way, get used to seeing the term ‘currency wars’ from us more often. Details soon.)
It’s also what you tend to see during periods of hyperinflation too. Those who have all their wealth in the hyperinflated currency, and who don’t own assets, will see their cost of living rise and incomes fall.
However, those with exposure to foreign currencies and who own assets, will see some of the ‘benefits’ of inflation. Because, though the currency devalues, asset prices rise.
Those wealthy enough to own assets may not notice the change, or they may feel as though they’re wealthier — even though for them, nothing has changed.
This is apparent in Moscow right now. As Bloomberg reports:
‘As the Russian economy shrinks, commodities consultant Alexander Prosviryakov is living larger than ever in Moscow.
‘Prosviryakov, who works at a Big Four accounting firm, got a bargain in April on an apartment two blocks from Pushkin Square — Moscow’s most popular meeting place. He said he’s paying about half as much in rent as the 120-square-meter apartment went for last year…
‘The owner of a 220-square-meter apartment in the prestigious Arbat region rented the unit to an international oil company for $14,000 a month until December. The landlord had to drop the price to the equivalent of $4,500 before finding a tenant this year…’
Taking into account the collapse of the ruble, the price drop in rubles isn’t quite as dramatic, although it’s still big.
Last May, US$14,000 in rent would have been around 467,000 rubles. At the end of January, US$4,500 in rent was worth around 321,000 rubles, around a 31% drop in the local currency.
So rents have fallen for Russians too, but not to the extent that they’ve fallen for those who earn in foreign currencies.
But with the higher oil price, perhaps things are starting to turn around for Russia. The sanctions are still hurting the Russian economy, but they appear to be muddling through. And of course, there is the ‘us against them’ mentality, which Russian leaders are good at utilising.
It’s why I added two specific Russian-related stocks to the Tactical Wealth buy list this month. One exclusively mirrors the performance of the Russian economy, the other mirrors the performance of Russia and several ‘satellite’ states.
You can find out more on this here.
In short, everything that’s going on in the world’s markets now is either directly or indirectly related to the currency wars, and the impact those ‘wars’ are having on commodity prices.
Given Australia’s reliance on commodity exports, it would be foolish to think that the Aussie economy is immune from all this action. It’s not. In fact, the Aussie economy is right at the forefront, hence the Reserve Bank of Australia’s drive to weaken the Aussie dollar and push interest rates to zero.
Editor, Tactical Wealth