Raff Report – January 2018

Golly gosh another year has gone by. Instead of matters for Aussie looking up they are decidedly looking worse by the day. The global sentiment concerning Australia is reflected in the ASX 200 where key companies have mostly treaded water for recent months with anaemic rises at best with few stars. Mum and dad investors need to understand that the direction of the ASX is determined by fund managers in Edinburgh, London, Oslo, Boston, New York and Hong Kong just to mention a spattering of financial centres. The other day the Raff was asked why such a poor performance by the ASX versus many of its peers. The answer to this question is pretty simple. Global investors do not have to invest in Australia.Many if not most off-shore fund managers allocate investmentfunds according to MSCI indexes and their performances against the same or similar. The picture shown below partially explains why the Dow Jones keeps making new highs and why the ASX 200 by comparison struggles. Note that Australia is not identified in the picture – precisely it’s too small and so who cares? Well it seems nobody does right now.

FIGURE 1: MSCI World Index

However it is true to say that some Aussie stocks are well placed on MSCI sector indexes like banks and resource companies. But overall, as already alluded to, Aussie is a non-event.

Imagine that you are a leading fund manager in Boston or London. Are you going to buy exposure to a country considering the following, just to mention the tip of an iceberg of negative situations?

• The country is deficient in power supply – blackouts expected in summer when all the air conditioners get turned on (in QLD temperature limits are suggested but how are households going to be monitored?) – How stupid is that?

• South Australia is spending truckloads of dosh on batteries that will need replacing every seven years.– let’s buckle to the minority no matter the cost.

• The barrel has been scraped forour elected leaders in the major political parties.

• The Liberals show as hopeless and with the Labor a shoe in at the next election, offshore investors no doubt see disaster lying ahead for Australia (look what happened to the NZ dollar when a socialist got a reign on power).

• Billions of dollars are being spent on the NBN when 5G wireless is probably a hundred times better. But no – let’s waste billions of dollars and protect outdated technology by refusing to grant sufficient band width for 5G wireless to compete with the NBN.

• Worse still are mutterings to place a levy (tax) on 5G and perhaps on other communications to fund a blowout in the NBN.

• Manufacturing as most people think of manufacturing is going the way of the dinosaur and government does not seem to give a dam.

• Oh –but we are going to build a few submarines at great cost instead of buying off-the-shelf from the USA. Sure jobs are being created but perhaps savings should have been used for more patrol boats also being built in South Australia.

• An intellectual desert talking recently on the ABC said no worries – ten percent of the workforce is engaged in manufacturing. Well how so? Simply change the definition of manufacturing to include drawing of plans and electronic design etc. It’s just too bad that the hundreds of workers that have lost jobs in or connected to car manufacture are not skilled in paper work etc. Now wonder Australia is up s…t creek.

• It is becoming increasingly difficult to identify where strong economic growth is going to come from to reduce the real level of unemployment remembering the official figures are a nonsense based on a dumb telephone survey (for a some weeks the Raff had to participate in one such survey – what a lot of bollocks).

As many would say it is what it is. The Raff reckons that at the next Federal election the protest vote against Liberal and Labour will be significant with legions turning to minor parties. It seems likely that never again will Liberal or Labor win power in their own right – crikey what a mess the country has become. The Raff’s remembers the golden years of the 1960s though to the mid-1970 – yep the Raff’s generation saw the best of times.

World Trade

Some of Henry’s readers might remember that yonks ago The Raff wrote a note on the correlation between total World Trade (imports + exports) versus a commodity price index. What the picture presented at the time was up to 2002 the two series were visually well correlated. In 2002 China’s economy took off like a Saturn 5 Rocket and likewise so did World Trade. This is entirely as should be expected except that commodity prices lagged by 12-18 months and then shot up likewise.

It’s now nearly 40 years since The Raff has kept tabs on economic cycles and in that time he has seen a bewildering number of charts showing this and that correlations more numerous than ants in the pantry. But when it comes to commodities as a basket, there is nothing better than trends in World Trade, as the best indicator topredict the direction of basket commodity prices– this is simply because in the main, they are demand driven. Surprise, surprise: perhaps on of Henry’s readers might let The Raff know when if ever a broker type analyst has compared trade with prices. In all the years as a mining portfolio manager no such work was evidenced.

In July 2017 the World Trade Organisation started publishing a new WORLD TRADE OUTLOOK INDICATOR or WTI. The next two pictures show the WTI for July 2017 and the WTI for November 2017 including an outlook for 4Q 2017.

FIGURE 2: WTI – July 2017

FIGURE 3: - November 2017.

Ok, so the outlook for trade was slowing in 4Q 2017. In past booms World Trade has recorded y/y growth of +10%, reversing in downturns by the same or worse. For a host of reasons World Trade will not see the sorts of growth phases between 2002 and 2009. The interesting metric is the 3.2% increase from the figure published in July versus November. It’s probably just a coincident but 6-7% increase in WTI would match closely China’s reported GDP increase of 6.9% for CY 2017.

Assuming copper as a bellwether indicator of industrial health and strength of the USD, it’s worth noting that price is falling back and LME inventory increasing a tad.

FIGURE 4: LME 1-Year Copper Price.

FIGURE 5: LME 1-Year Inventory.

The mega miners like BHP and RIO have performed pretty well of late. Should World Trade continue to advance then leading resource stocks should continue to outperform the likes of the banks. The Raff will endeavour to keep Henry’s readers abreast of any changes in trade. The Raff admits to being somewhat tardy of late with contributions to Henry because he has accepted a wonderful opportunity to complete a PhD at UNSW over the next three and a half years. Since 1969 the sapphire deposits in Central Queensland, some 250km west of Rockhampton, continue to be of great interest – a thesis looking at the origins of the occurrences of these coloured gems is underway.

The Raff trusts that all of Henry’s readers have a healthy and successful 2018.