My Oil pessimism is leading to a buy opportunity

My call of WTI Crude Oil visiting $65 still stands.

So, WTI Crude has fallen $9 in the past 2 days.

Now, it’s trading at $73.70

But that’s just reporting the news.

Depending on the strength of the downtrend, the next stop below is ~$62 and failing that, then we may see $54.

(technical trending analysis hint: watch the ADX on the DMI)

Back when Oil was surging to $120, my writings were warning readers to not chase prices higher especially following parabolic price moves and the gravitational pull of long, long term moving averages.

To boot, the price of Oil tracks GDP, it is a large component of inflation readings….and I think that the WTI Oil price leads interest rates.

Keep in mind, that the U.S. 10 yer bond yield was recently 4.33% and now its 3.71%.

To wit, the 10 year bond yield could see 3.30%, if not 2.5% in several months, to latently mimic the Oil price.

So, I say, many had no business buying Oil at $115 nor betting that GDP will expand and the near halving of its price from those highs should be recognised as assisting the moderation of near-term inflation.

While I think $65 is possible, it’s not a time to ‘short’ Oil as such a bet is marginal. Oil may fall $10 or rise $10. Ho hum !!

The fat part of the short trade has been seen.

The preparation is for a low in Oil and then how that relates to other assets and securities.

January 5, 2023

by Rob Zdravevski

Rising GDP means higher inflation and interest rates

Below is an extract from this week’s IMF economic forecast report showing World GDP is set to rise 21% over the next 5 years.

This is an average of 4.2%, which is a good 35% higher than the post GFC GDP growth average from 2013-17.

So, how can the world’s economy grow by one-fifth in short period of time, without any material inflationary pressures when companies are telling us they see rising costs, constraint in capacity and the need to increase selling prices?

We will see a huge amount demand for production output constrained by production supply.

3 into 1, just won’t fit.

I think central banks in the ‘developed world’ are behind the curve.

Russia, Mexico, Brazil are commodity producing and commodity sensitive economies. Their central banks have been raising rates citing reasons to curb the rising cost of living.

Inflation is a tax that the ‘poor’ can’t afford to pay.

Their citizens are amongst the least indebted in terms of personal debt to GDP, so rising interest rates doesn’t threaten the value of their real estate and financial asset values unlike the sky-high indebted citizens of Australia, Canada, the U.S. and the U.K.

(see the other image below)

Interestingly, South Korea, Norway and New Zealand are the first of the developed world economies to raise interest rates. Their central bank reasons were to curb their respective country’s soaring household debt and home prices. Not the cost of living……

October 13, 2021

by Rob Zdravevski

#economy #interestrates #growth #realestate

Health Check – the Copper/Gold Ratio

The watching the direction (not necessarily its value) of the Copper/Gold Ratio helps me reading the health of the economy.

And it has been healthy….

It’s particularly correlated with the direction of the U.S. Government 10 Year Bond Yield. More on that in the next post.

The chart below shows us the 6 moments when the Copper/Gold Ratio has registered an Overbought reading over the past 20 years.

Such occurrences correlate to and increase the probability of lower prices in the S&P 500 Index or at the very least see it trade sideways for the coming months. This also coincides with my thesis in my recent newsletter.

What this chart tells you is that probability does not suggest ‘going long’ or making any meaningful capital deployment into equities at this juncture.

May 2, 2021

by Rob Zdravevski

Apple’s market cap is larger than South Korea’s GDP

If Apple’s market cap (currently $2 trillion) doubles from here, it’ll be larger than the German economy. *
(and Amazon and Microsoft aren’t too far behind)

Today, Apple’s value is already larger than economies of Italy, Brazil, Canada, Russia, Spain or South Korea.

It’s already nearly double that of Australia’s GDP.

Many speak about “big tech” being overvalued and perhaps so, but a more pertinent reason to consider before buying shares in such behemoths at today’s prices is the LAW OF LARGE NUMBERS.

And a couple years ago, I thought Exxon Mobil was a Goliath at $350 billion market cap…..

Investors may find more interesting investment ideas in the Mid Cap market. FYI, the average market cap of a stock in the S&P 400 Mid Cap Index is about US$4.7 billion.

* Germany’s annual GDP is $3.7 trillion.

p.s. we know that GDP isn’t an equal measure to market capitalisation, but it made me raise an eyebrow.


September 29, 2020
by Rob Zdravevski

Putting China in context – Part 1

Today, China’s Shanghai Stock Exchange Composite Index (SHCOMP) is trading at 2,200 which is the same level seen in 2011, 2008 and 2006,

You can buy the Chinese stock market today for the same price that it was 7 years ago.

Furthermore, it’s trading at one-third of its 6,124 point high seen in October 2007 with a Price/Earnings Ratio of 11 and Dividend Yield of 2.3%.

Economists are suggesting that for China to move it’s into next phase of expansion and prosperity, the economy would need to move from bing dominated by manufacturing  into one that is driven by domestic consumption. I think this argument is irrelevant.

Sometimes too much analysis can be counter-productive.

I don’t think pundits were wondering when America was going to morph from its industrial manufacturing roots into a consumer society back in 1910. As The Roaring ’20’s came around, it just happened.

Interestingly, many developed economies now yearn for a return of their manufacturing economy.

Recently, the SHCOMP fell 2% because China only reported GDP growth of 7.7% rather than the consensus expectations of 8%. Analysts then expressed their “disappointment” and promptly wrote reports re-iterating their case for a decline in China’s economics.

Many countries could only wish for the growth that China has.


Are German bonds all that?

North Rhein Westphalia (NRW) goes to the polls this weekend.

The political tension surrounding the elections is about many seats Angela Merkel’s party may lose.

NRW is Germany’s most populous state and it’s GDP equals 22% of Germany’s total and if it were a country, it’s economy would be the world’s 14th largest. With a GDP estimated to be in the range of $550 billion and it carries a debt of approx. $230 billion, which is quite a debt for a state with a population of 18 million.

Actually, its Debt to GDP ratio is quite conservative when compared to the whole of Germany’s which runs at around 85%.

While Germany’s GDP to Debt ratio is below the 105%+ marks that Greece, Italy, Portugal, Ireland and the U.S. carry, it is worth exploring why German debt is more revered than France’s.

France’s Debt to GDP ratio is close to Germany’s, yet their 10 year bond has a yield of 2.80% while Germany’s commands a “safe haven” status of 1.52%.

Why do German 10 year bonds trade at 1.52% and why did investors recently accept a negative yield for their short-term deposits?

Is it because Germany’s debt obligations are perceived to be safer than France’s?

For some background, it’s important to note that European countries gave up their right to control their monetary base when they adopted the Euro. It is the European Central Bank that establishes interest rate and monetary policy.

Yet the Bundesbank has said that “it won’t allow inflation to rise”. Hmm, so if inflation rises in Germany (currently at 2% p.a) and the Bundesbank can’t set interest rate policy – how does it propose to control inflation? Perhaps it can influence it’s government to decrease government spending. I don’t think this would help it’s safe haven bond perception.

A German 10 year bond yield 1.52% seems to be close to the low end of its logical range. If inflation rises, German federal and leading state government debt rises and its GDP purchasing power weakens, I can see these bond yields tripling before they halve.

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