David Fuller and Eoin Treacy's Comment of the Day
Category - General

    China Abandons Hard Growth Target, Shifts Stimulus Focus to Jobs

    This article from Bloomberg news may be of interest to subscribers. Here is a section:

    With more than $500 billion in infrastructure bonds to be issued this year and more monetary easing on the horizon, China is trying to cement a fragile domestic recovery without indulging in the kind of debt blowouts seen in the U.S. and Europe. The world’s largest exporter is therefore still reliant on other countries reining in the pandemic and on a reboot of global trade.

    “We have not set a specific target for economic growth this year,” Li said, speaking in the Great Hall of the People. “This is because our country will face some factors that are difficult to predict in its development due to the great uncertainty regarding the Covid-19 pandemic and the world economic and trade environment.”

    Shifting away from a hard target for output growth breaks with decades of Communist Party planning habits and is an admission of the deep rupture the pandemic has caused. Economists surveyed by Bloomberg expect China’s economy to expand just 1.8% this year, its worst performance since the 1970s.

    At the same time, Li gave a precise figure for the targeted budget deficit, widening it to more than 3.6% of gross domestic product. Including the issuance of special bonds, that brings a broader measure of the deficit to more than 8%, according to Bloomberg Economics.

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    Poor Americans Hit Hardest by Job Losses Amid Lockdowns, Fed Says

    This article by Jeanna Smialek for the New York Times may be of interest to subscribers. Here is a section:

    One in five people who were working in February reported losing a job or being furloughed in March or the beginning of April, the data showed, and that pain was highly concentrated among low earners. Fully 39 percent of former workers living in a household earning $40,000 or less lost work, compared with 13 percent in those making more than $100,000, a Fed official said.

    The U.S. economy began slowing in March as state and local governments instituted stay-at-home orders to tame the coronavirus’ rapid spread. That has most likely caused the steepest growth decline in the United States’ postwar history. Consumer spending has plummeted as stores and restaurants closed, and mass layoffs have become a feature of everyday life. Nearly three million people filed for unemployment benefits last week, pushing the two-month tally over 36 million.

    And

    While about 53 percent of those with jobs worked from home at the end of March, that was a highly educated group. More than 60 percent of workers with at least a bachelor’s degree worked completely from home, versus 20 percent of those with a high school degree or less.

    Among those who had lost hours or jobs amid the pandemic, 48 percent were “finding it difficult to get by” or “just getting by,” according to the survey. Just 64 percent of those who had taken an employment hit felt that they would be able to pay their bills in April, compared with 85 percent of those without a work disruption.

    Those challenges came as a large swath of Americans took pay cuts. About 23 percent of all adults, and 70 percent of those who had lost their jobs or their hours reduced, said their income was lower in March than in February.

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    Email of the day - on rare earth metals

    Many governments are looking at how they can reduce their countries' dependence on China for strategic items. One of these are the rare metals. How can we invest in rare metal miners outside China?

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    China ore bust? Fortescue's record week

    This article from Morningstar may be of interest to subscribers. Here is a section:

    And FMG had a pretty good week this week: its share price hit a record high of $13.28 amid growth in Chinese production, an inflated iron ore price of about US$90, and a supply shock in Brazil, which is in the grip of the coronavirus and still recovering from that deadly Brumadinho dam disaster in January last year.

    Nor did the decision later in the week by China to tighten inspections on iron ore imports dampen sentiment. Will FMG’s price continue to soar? It has a steely balance sheet, good projects in train, a healthy dividend payout, and chief executive Elizabeth Gaines is adamant Chinese demand for imports remains despite the Middle Kingdom’s ore stockpiles.

    But can the iron ore price keep going? Morningstar director Mathew Hodge isn’t so sure. In fact, he expects it to halve over the next few years as China’s demand moderates and Brazil recovers. His fair value estimate for FMG is $6.80, which means it’s overvalued by about 100 per cent.

    “Fortescue now trades at a premium to our $12.00 bull-case valuation,” Hodge says. “Our bull case incorporates an average iron ore price to 2024 of US$74 per tonne and US$60 per tonne from 2025 onwards. This compares with our base case assumptions of US$58 to end 2024 and US$43 from 2025 onwards.”

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    Where Should Metals For The Green Transition Come From

    This whitepaper may be of interest to subscribers. Here is a section:   

    Novel techniques, efficiency innovations, or alternate raw-material sources can create step-function changes in industry outcomes. Seafloor nodules may present such an opportunity; a very large supply of EV battery metals lies in a relatively small area of the ocean floor.

    Ocean minerals come in several forms: seafloor massive sulfides (SMSs—similar to land sulfides), cobalt crusts, and polymetallic nodules. In this report, we focus only on polymetallic nodules sitting unattached on the ocean floor in an area of the South Pacific Ocean known as the Clarion-Clipperton Zone (CCZ) (see Figure 13). The metal composition of this ocean resource is uniquely aligned with the base metal needs of the EV industry; polymetallic nodules contain nickel, cobalt, and manganese required for EV batteries, and copper required for battery-current collectors and electric harnesses. The ratio of nickel to cobalt closely matches the ratio of NMC 811 battery chemistry (see Table 2). The size of the resource is substantial, with CCZ nodules containing enough metal to electrify the global EV fleet four times over.

    Unlike land-based ore bodies that fall under the jurisdiction of sovereign nation-states, the CCZ polymetallic nodules are located in international waters and are deemed to be part of the “common heritage of mankind.” According to international law, the development of this resource needs to be undertaken in a manner that benefits both developed and developing nations. The use of this resource is regulated by the International Seabed Authority (ISA), an intergovernmental body established in 1994 by the United Nations Convention on the Law of the Sea. The ISA has so far issued 16 exploration contracts, with the stated goal of having regulations in place by 2020 to allow prompt commencement of commercial production.

    The development of the polymetallic nodule resource has been greeted with opposition from several ocean conservation-focused NGOs, including Greenpeace and DOSI.71 The main objection is centered around impacts on deep-sea wildlife: removing nodules will mean removing a feature of the habitat that is critical for several life functions of nodule-dwelling marine animals.

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    China's Got a New Plan to Overtake the U.S. in Tech

    This article from Bloomberg news may be of interest to subscribers. Here is a section:

    In the masterplan backed by President Xi Jinping himself, China will invest an estimated $1.4 trillion over six years to 2025, calling on urban governments and private tech giants like Huawei Technologies Co. to lay fifth generation wireless networks, install cameras and sensors, and develop AI software that will underpin autonomous driving to automated factories and mass surveillance.

    The new infrastructure initiative is expected to drive mainly local giants from Alibaba and Huawei
    to SenseTime Group Ltd. at the expense of U.S. companies. As tech nationalism mounts, the investment drive will reduce China’s dependence on foreign technology, echoing objectives set forth previously in the Made in China 2025 program. Such initiatives have already drawn fierce criticism from the Trump administration, resulting in moves to block the rise of Chinese tech companies such as Huawei.

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    The Big Cycles Over The Last 500 Years

    This article by Ray Dalio may be of interest to subscribers. Here is a section:

    In brief, after the creation of a new set of rules establishes the new world order, there is typically a peaceful and prosperous period.  As people get used to this they increasingly bet on the prosperity continuing, and they increasingly borrow money to do that, which eventually leads to a bubble.  As the prosperity increases the wealth gap grows.  Eventually the debt bubble bursts, which leads to the printing of money and credit and increased internal conflict, which leads to some sort of wealth redistribution revolution that can be peaceful or violent.  Typically, at that time late in the cycle the leading empire that won the last economic and geopolitical war is less powerful relative to rival powers that prospered during the prosperous period, and with the bad economic conditions and the disagreements between powers there is typically some kind of war.  Out of these debt, economic, domestic, and world-order breakdowns that take the forms of revolutions and wars come new winners and losers.  Then the winners get together to create the new domestic and world orders.  

    That is what has repeatedly happened through time.  The lines in the chart signify the relative powers of the 11 most powerful empires over the last 500 years.  In the chart below you can see where the US and China are currently in their cycles.  As you can see the United States is now the most powerful empire by not much, it is in relative decline, Chinese power is rapidly rising, and no other powers come close.  

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    Gold Retreats Amid Profit-Taking Before Long Weekend

    This article by Justina Vasquez and Elena Mazneva for Bloomberg may be of interest to subscribers. Here is a section:

    “Looking at the U.S. weekly jobless claim data, it is clear that things are not dire as they were but the upward movement in the gold price confirms that investors are wary about the continuous claim data,” Naeem Aslam, chief market analyst at Ava Trade, says in an email

    “There is no doubt we have seen a bottom in the macro data”

    “Many appear keen to start taking profit on gold as it heads toward $1,750,” said Howie Lee, an economist at Oversea-Chinese Banking Corp. “We have not seen any inclinations on interest rates to move significantly lower, while the dollar looks to have broadly stabilized”

    The gold market is long and is taking some profits ahead of a long weekend, according to David Govett, head of precious metals trading at Marex Spectron Investors are “probably a bit disappointed that it couldn’t make new highs yesterday”

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