Resources meltdown: Armageddon or an opportunity?

By Johann van Rooyen

With the Bloomberg commodity index (representing 22 raw materials) trading at a 16-year low and billions of dollars having being wiped off the value of mining companies, overwhelming fear and despondency have gripped resources investors worldwide.

Commodity prices are collapsing. The price of iron ore has dropped by 45% this year, that of copper by 27% and other minerals by even more. Glencore and Anglo American have lost more than 70% of their market cap this year alone - the latter just announced that it is slashing its assets and workforce by over 60%. Glencore is selling its assets as fast as it can, BHP has shifted its worst performing assets into a separate company and Rio Tinto has slashed capital expenditure by $1 billion. While the immediate outlook for these relatively financially sounder large companies is dismal, hundreds of smaller resources companies face extinction -  collectively the commodity sector issued $1.9 trillion in bonds over the past five years and there is great concern now for the ability of many of these companies to keep on servicing their debt.

How did it come to this, so fast and so severe, from a commodity supercycle to a complete bust? Basically it is a combination of three things: 

1. A massive over-supply caused by the money printing and low interest rates of the central banks of the United States, Europe and China  - this led to vast-scale borrowing to open new mines and increase supply;

2.  As the dollar becomes stronger, it makes commodities more expensive and reduces demand further;

3.  A slowing Chinese economy and the resulting lower demand for resources from the world’s biggest consumer of resources.  

With all this doom and gloom it is not surprising that virtually all analysts and fund managers are predicting prices to continue sliding and expecting even more of a commodities Armageddon. The ‘get out of commodities’ trade is virtually unanimous and blood is almost literally flowing in the streets of commodity land.

But, the question for the astute and more risk-tolerant investor is whether this then not the time to be a contrarian and go the opposite way, to buy assets of solid companies that are on a sale at a price of 10 - 30% what they cost one year ago?

There are several compelling reasons to consider such as move, least of all outstanding longer term value found in many of the former resources blue chips – most are trading at a 19% discount on net asset values at forward curve prices, according to an RBC analysis. A second reason is that, as mining companies such as Anglo are cutting back supply, supply and demand will reach an equilibrium eventually and any supply disruption could cause panic buying without much warning. Thirdly, China and the Eurozone both have their hand on the stimulus tap and would not be averse to unleash more QE, which could benefit commodities.

Fourthly, the U.S. economy is growing steadily now and it remains the second largest consumer of commodities. Lastly, the strong dollar may have already discounted the pending rise in U.S. interest rates and could eventually adjust to lower levels, which will make American exports more affordable and resource prices cheaper.

It is not often that a potential trade is so much against the overwhelming consensus and there is no doubt that it will be fraught with risk, but for the patient investor who uses cost-averaging, the benefits could be substantial.  

   

ANC government destroying South African tourism sector

A  recent report  by the Tourism Business Council of SA suggests that the number of lost foreign tourists due to changes in South African immigration regulations in 2015 will increase to 100 000, with a direct tourism spend of R1.4bn and the total net loss to the South African GDP of around R4.1bn and a loss of 9 300 jobs.

The changes refer to the requirement for all children under the age of 18 travelling to and from South Africa to be in possession of an unabridged birth certificate in addition to their passport and visa and secondly, that tourists from countries that are required to have a visa to now appear in person during the visa application process in order to obtain a biometric visa. 

Not only is the ANC government led by Jacob Zuma corrupt, incompetent and out of control, but it is now downright suicidal by destroying the booming foreign tourism sector and causing irreparable harm to the South African economy. Can the Deputy President, Cyril Ramaphosa wait too much longer before he gets rid of Zuma through a palace revolution? 

58-trillion reasons why you should be worrried

Following weeks of relentless turmoil in the world's bond markets which saw bonds losing a collective $450 billion and yields rising rapidly, there is growing fear of a bond market implosion. Post-2008/09 government spending and the issuance of debt has led to an almost 80% increase in government obligations to over $58 trillion worldwide.

The fear is that even the safest government debt is not as safe as previously assumed, hence the wild swings in (the bluest-chip) German government 10-year  bonds  -  where yields went from 0.05% to 0.70% in less than a month, to mid-May. The situation is of course much worse in  basket-cases such as Greece, Hungary and the Ukraine, but terms of debt-to-GDP ratio, has even reached dangerous levels in Italy, Japan, Malaysia, China, Ireland, Singapore and Belgium.

According to Claus Vogt, co-author of 'The Global Debt Trap' (cited in The Globe and Mail,  14 May 2015), the massive government debt has reached bubble proportions due to money-printing and interest rates already at close to 0%. A minor black-swan event and a loss of confidence in central bankers abilities to manage unprecedented quantitative easing,  could lead to "a stampede out of stock and bonds" and presumably the collapse of financial markets. Bonds are not generally not as liquid as stocks and a sudden mass rush out of the market would be catastrophic.

Similarly, there is a huge risk in fixed-income ETFs, should such a s collapse occur. These bond ETFs are not very liquid and could be severely impacted by mass-liquidations. While large issuers of these ETFs such as Vanguard have created bank guarantees and lines of credit to provide liquidity in case of a rush to the exits by investors, it is doubtful if these facilities would be sufficient. For example Vanguard created a facility of $2.89 billion, but this is meant to cover $3 trillion of assets, i.e. less than one-tenth of one percent.

With stock markets in Europe booming and reaching new highs almost daily in the United States and following years of huge gains from bond investing, the party may be coming to an end, and it may happen much faster and with a much more severe  outcome than foreseen by most.    

Solar energy reaching critical mass?

During 2015, a total of 115 GW (gigawatt) of renewable power projects were started up worldwide, of which China contributed about 45 GW - an investment in renewables of US$329 billion. One GW can power about 700,00 houses and a total of 914 GW has now been installed worldwide, enough to power 640 million homes.

Solar remains the largest renewable component and after overcoming many hurdles over the past decade, the solar industry is rapidly reaching sufficient momentum to become a major element of the world's energy supply.

With technological advances and falling costs (by 75% over the past few years), solar energy, especially the roof-top solar panels, are fast becoming competitive with coal (the cheapest and dirtiest form of power generation) and could be on par in terms of cost within 18 months, according to Deutsche Bank - and it can now survive virtually without government subsidies.

Home-based solar systems are becoming the norm in new housing in the southern and western United States where there is abundant sunshine and where 600,000 homes are already fitted with solar panels. It provides homeowners not only with electricity on par with traditional carbon-based energy supplies, but it enables them to go 'off-grid', especially in countries such as South Africa which cannot meet demand and suffer from serious supply interruptions. Homeowners with solar are also able to store excess power in batteries or to sell it to the grid at a profit.

In addition, with the growing environmental movement and concern about climate change, clean and renewable solar power has no competition from all other forms of energy production, except perhaps from thermal or hydro-electricity, but even then its footprint is so much smaller than that of hydro.

All of this provides huge opportunities for investors and there are a number of investment opportunities in the form of companies with leading-edge technology and efficient cost-structures and in the funds which invest in these companies. First Solar is arguably the leader in thin-film solar panel production and provider of utility-scale PV power plants, while SunEdison develops, builds, owns and operates solar plants and manufactures solar panels and components. SolarCity finances, constructs and then leases solar-power systems (typically for 20 years) to domestic customers in the United States. Former South African, Tesla's Elon Musk, is also the chairman of SolarCity and he is aiming to use the Tesla-SolarCity partnership to jointly develop lithium-ion batteries that can be used both for the electric cars and household solar power storage. SolarCity aims to increase its customers base from about 170,000 to one million by 2018 - this will represent only a 2.5% penetration of the American domestic market, leaving an immense untapped market. For investors who want to play it safe and diversify, the Guggenheim  solar ETF called TAN provides a good spread of the top solar companies - its six top holdings are Hanergy, Sunedison, First Solar, Sunpower, SolarCity and GCL.

Johann van Rooyen (for GlobalFinancesandPolitics)

Investors: Financial and political risks you should know about, now.

As we enter the month of March 2015, with the world's stock markets once again reaching all-time record highs and with fear apparently having disappeared from investors' psyche (as evident by the VIX), there are many reasons to get cautious. Here are a few of the more important financial, economic and political risks that should be built into any 2015 investment decision.

1. The tech-heavy NASDAQ composite index has again breached the 5,000 mark, 15 years after it did so in March 2000. At that time, it collapsed and lost 78% of its value over the next two years and ended at 1,114. The 5,000 level is fraught with danger and the downside potential hugely outweighs possible further gains. The same holds for the S&P 500 and Dow Jones index, both which reached new all-time highs almost on a daily basis over the past two months. It might be wise at this point to ignore the 'market experts' who never tire of suggesting that "this time it is different" and that the markets are still "very undervalued". Big investors are shifting their money into cash -  it might be a good idea to do the same and wait for the inevitable crash or at least a substantial correction.  

  

2. Denmark's central bank bought a record amount of foreign currency over the past few weeks in order to keep the Danish currency pegged to the Euro, purchasing foreign exchange equal to 9% of Denmarks' GDP. This kind of currency manipulation by Denmark is in line with the 'beggar thy neighbour' policies implemented by central banks of Canada, Switzerland, the Euro Zone, Australia, Russia, India, Singapore, Sweden and soon, perhaps China. The year 2015 is going to be marked by currency wars, devaluation, negative interest rates and central government stimulus policies aimed at fighting deflation and creating competitive advantages of one country over the the next through fiscal engineering. It may provide short-term advantages, but it is logical that if all countries engage in this behaviour simultaneously, there can ultimately be no winner.

3. Apart from the Greek financial calamity which most likely will end up in Greece's exit from the Eurozone, other sovereign states such as Italy, Spain and Portugal are still facing severe economic difficulties, deflation and massive unemployment. Spain's unemployment rate is 24% and that of Portugal and Italy between 13 and 14% and Eurozone deflation is running on-off at almost 0.5%. But the risks appeared to be spreading to the sub-sovereign level, as pointed out by  Ambrose Evans-Pritchard in The Daily Telegraph. He is referring to the Austrian province of Carinthia, which faces probable bankruptcy after Austria’s central government refused to act as back-stop for debts which is a result of the province's exposure eastern Europe and the Balkans. The Austrian federal government refuse to cover more than €10bn in bond guarantees issued by the Carinthia for the failed lender Hypo Alpe Adria and bondholders may face a 50% hair-cut and the province a possible default and bankruptcy. This pattern could repeat itself throughout other regions, provinces, states and cities with exposure to the Ukraine and its flirtation with default. Belgium's Wallonia and the Italian region of Sicily are both mentioned a vulnerable by Evans-Pritchard.

4. But Europe is not alone in facing deflation, financial crisis and more importantly, DEBT. According to the McKinsey Global Institute global debt has increased to by 17% to $57 trillion since 2007, much of it in emerging economies, but even more so in the developed world (cited by Jeremy Warner in The Daily Telegraph). The combined public sector debt of the G7 countries has grown to about 120% of GDP and that of China to 282% of GDP ($28 trillion).  While governments traditionally have dealt with debt through inflation, low interest rates  and money printing, in today's deflationary environment this does not work at so well. Warner suggests that "as global debt rises off the scale, creditors stand to take a huge hit in a threatened tsunami of defaults...only a mass default will end the world's addiction to debt".

5.  The geopolitical risks posed by Russian neo-imperialism and the rise of the radical Islam in the Middle-East, Africa and South-east Asia, cannot be underestimated and could present a disaster to even the most meticulously-planned financial portfolio.  Putin's goal of re-uniting Russian-speaking territories in the former Soviet empire, reckless military adventurism and proxy wars are eerily similar to Hitler's goals and behaviour from 1935 to 1939.  Putin will probably not stop until either he has achieved his goals or until he is confronted by the possibility of actual conflict with the NATO alliance - even then he probably has calculated that the West will not risk Armageddon to protect Latvia, Estonia or Poland. The Islamic state and its franchise partners al-Qaeda, Boko Haram, Al-Shabaab, and many sympathizers already within the borders of Europe and North America, threaten with a third world war in all but name, spanning continents and lasting decades. Apart from the threat of concerted 9/11-style attacks on Western targets, smaller cells pose a more immediate and real threat to shopping malls, airports, train stations and sports stadiums in London, Paris, Sydney, Ottawa, Copenhagen and New York.

6. The decline in the price of oil might not be finished yet. While it has dropped from $147 at its peak five years ago to about $102 last year and to $51 today, supply is still far greater than demand. Currently, the U.S. is producing and importing one million barrels more per day than it is using, pushing oil inventories to the highest levels in 80 years. At this rate storage facilities could reach their maximum capacity by mid-April, causing another drop in oil prices, perhaps to $30 or even $20.

7. The Chinese economy is slowing down dramatically, opening the way for further declines in the prices of resources and possibly dragging the world economy down with it. China is facing growing budget deficits, production over-capacity, deflation, falling real estate prices and a major credit crunch. Total credit has increased from 100% to 250% of GDP since 2007, according to Ambrose Evans-Pritchard in The Daily Telegraph, equalling $26 trillion (the same number as the US and Japanese banking systems combined). In addition, China's official annual GDP has fallen from close to 15% in 2007 to about 7% in 2014. To make matters worse, the Chinese currency is pegged to the inflating U.S. Dollar and has similarly increased its value by 27% against
the Euro and by much more against most other currencies, making exports more difficult. China has now lowered interest rates from 7% to 5.5% in an attempt to address growing fiscal challenges, but ultimately it may have to pull out currency devaluation as its weapon of last resort, something which could severely damage the world economy and send panicked investors fleeing for the hills.

The U.S. tax war on Expats

The United States Internal Revenue Service is pursuing a damaging war on its citizens living abroad by demanding tax returns from American citizens worldwide irrespective of where they are resident, leading growing numbers of expat Americans to formally renounce their citizenship. Almost 4,000 Americans did exactly this in 2014, the latest being the mayor of London, Boris Johnson, a dual British and American national.

According to Brett Arends in the Wall Street Journal’s Marketwatch, U.S. financial laws that make it nearly impossible for expats to keep two passports (not that the U.S. has ever encouraged dual citizenship!). According to Arends, the federal government is “ramping up a wide set of bizarre and impossible regulations on all Americans living abroad — and threatening them with the financial equivalent of the death penalty if they don’t comply…they can be arrested, thrown in jail and bankrupted by Uncle Sam for failing to disclose a $15,000 checking account on which (they) have paid all the taxes owed”. In addition, such expats are liable to double taxation, required to spend thousands of dollars a year on professional advice simply to survive, are effectively barred from investing in either U.S. or non-U.S. based mutual funds and stripped of a number of constitutional rights.

At the same time, the Obama administration is allowing millions of illegal, or so-called ‘undocumented’ immigrants, mostly from Mexico, to acquire legal status and to get work permits and benefits normally associated with holders of green cards.

Currency Wars 2015

The year 2015 has introduced the phenomena of currency wars, devaluation, negative interest rates and central government stimulus policies aimed at fighting deflation and creating competitive advantages of one country over the the next through fiscal engineering.

Randall W. Forsyth wrote in Barrons that "not since the 1930s have central banks of countries around the globe so actively, and desperately, tried to stimulate their domestic economies. Confronted by a lack of domestic demand, which has been constrained by a massive debt load taken on during the boom times, they instead have sought to grab a bigger slice of the global economic pie". However, if the world economy is not growing at a sufficiently rate, in other words if the global pie is not expanding, this is a zero-sum game without any winners, except, as analysts at Morgan Stanley argue, that the early movers in currency wars are the biggest beneficiaries at the expense of the late movers.

This beggar thy neighbour policies implemented by central banks of Canada, Switzerland, Denmark, the Euro Zone, Australia, Russia, India, Singapore and Sweden may provide short -term advantages, but it is logical that if all countries engage in this behaviour simultaneously, there can ultimately be no winner. The U.S. implemented the first large-scale stimulus programme with its quantitative-easing and near 0% interest rates. Japan followed next and now it is the turn of the EU. The world's largest economy, China, might be the next huge player to devalue its currency, a truly frightening prospect. The United States is threatening to punish other states with import tariffs if it can be proven that an exporting country is deliberately weakening their currency to make its exports cheaper and the prospects for global trade war is increasing by the day.

Ironically, currency devaluation and the return to the Drachma might be Greece's only salvation and a way to rebalance its economy and boost exports and in this case, it might even be the prudent step to take. As for the rest of participants and prospective currency warriors, this can only end badly.

Is Germany fed-up with Greek intransigence?

The new Greek governing Party, Syriza,  is rapidly moving

into a minefield and down a road of no return. Just when you think could not possibly get worse for Greece, the country propels itself head on to the edge of economic default and total financial ruin, brought onto itself following decades of uncontrolled spending and a ruinous approach to financial governance. Greece is now is making additional strategic blunders by turning against their allies in the European Union and NATO, invoking German war crimes of 70 years ago and demanding 'war' reparations, planning for wholesale debt-write-offs, and threatening the NATO alliance with overtures to Russia.

It will come as little surprise if Germany throw in the towel and let Greece exit from the EU, and in fact, this scenario has probably already been build into German planning. Germany does not need Greece, but the same cannot be said for Greece.

Residency through Investment - some easy options

Among the most popular 'Club Med' countries where one can obtain residency and a EU passport are Cypress. Malta, Greece, Spain and Portugal. You can get Cypriot permanent residence by transferring about €300,000 to a Cyprus Bank on a fixed deposit for three years.

Malta has a Global Residence Program which allows expats the opportunity to buy or rent property in Malta and direct their foreign income to Malta in exchange for residence permit. The minimum investment in property is between €220,000 and €275,000 depending on the region and the minimum tax payable is €15,000 per family, while renters must pay at least €800 monthly.

In Spain, the simplest way is to invest €500,000 in a property and in return, obtain a temporary

 residence which has to be renewed each year. After five years the applicant receives permanent residency and citizenship after another five further years. The Spanish temporary residence permit allows for limited travel throughout Schengen zone for 90 days within a 180 day period, but does not give the recipient the right to work in Spain.

Portugal offers expats the opportunity to become residents through the Golden Residence Permit and it
is available to non-EU investors. Applicants can buy real estate of at least €500,000 or alternatively, make a capital investment of at least €1 million in a Portuguese company or establish a Portuguese company that employs more than ten people. Successful applicants get visa-free access to the Schengen Area, receive permanent residence after five years and Portuguese citizenship one year later.

As part of its efforts to raise income Greece is offering non-EU investors permanent residency similar to the Golden Visa of Spain and Portugal, by way of an investment of €250,000 in a Greek property for five years or if they own a ten-year time-sharing contract. Residence permits may be renewed for a further five years upon expiry if the resident maintains the status quo, but it does not allow employment