The Independent Investor: There's Nothing Sheepish About the Price of Wool
We humans have been using wool for thousands of years. It was the primary clothing material of the middle ages. But even today, new uses for wool are cropping up, driving prices to record highs.
The primary use for wool continues to be in clothing production. The newest demand for this natural material is coming from sport's companies such Nike, Puma and Adidas that are weaving it into sneakers. It appears that a new generation of consumers prefer natural over synthetic fibers. They want to know where their products come from and where they are going.
Even old codgers like me are not immune to this trend. Six months ago, I purchased my first pair of wool shoes. Not only are they the most comfortable shoes I have ever worn, but the wool is both warm in the winter and cool in the summer. A client reminded me that weavers are also using increasing amounts of wool in their products as well.
Actually, there are plenty of other uses for wool. Wool is the top choice for high-quality carpets, for example. You'll also likely find it in the padding underneath that rug as well. Furniture, such as seat upholstery, as well as stuffing and covers are also made from wool. Blinds, curtains, cushions, even wallpapers, are often made of wool, as are blankets and wool-filled duvets.
Wool is also coming into vogue in places like China. The growing affluence of its people and its manufacturing prowess make China an increasingly important market for wool. Australia is the world's largest supplier of apparel wool (90 percent market share). China consumes about 78 percent of their exports, but there are about 100 countries worldwide with at least some wool production.
New Zealand, Uruguay, the U.S. and China all contributed to the 1,161 million kilograms of wool produced in 2017, according to the International Wool Textile organization. That is a 70-year low.
The bad news is that wool is expensive to use and that situation won't be changing anytime soon. In Australia, wool production has been stable since 2010 and is forecasted to grow by a mere 4 percent this year to about 446,000 metric tons. Why?
Well, lamb chops explain part of the reason. Sheep production has been increasingly focused on meat production, rather than wool. Refocusing production to produce more wool and less meat is a multiyear process and cannot be accomplished over the short-term. The decision to switch may have more to do with demand here in the U.S. than anywhere else. Increased demand for wool in the United States represents the largest growth opportunity for Australia's wool products. An estimated 70 million sheep were shorn in the Down Under last year.
For that to increase, the Aussies want to see our consumption of wool on a per capita basis increase. Today we consume a mere 300 grams (11 ounces) per year. That compares with about one kilogram of consumption in China, Europe and Canada. I'm betting consumption will increase, but as it does, so will the price of wool, at least for the next year or two. So my advice is to buy those sneakers or that sweater now, because it is just going to get more expensive in the future.
|Write a comment - 0 Comments|
The Independent Investor: Is Bitcoin Broken?
Bitcoin, Ethreum, Ripple and a number of other crypto currencies have had a terrible week. Some of these digital dollars have lost 25 percent overnight, if not more. Today Bitcoin, itself, is down almost 50 percent from that level. Those who warned that this mania would come to a tragic end are crowing now. Are they right?
Last July, I wrote my first column on the phenomena of crypto currencies. Since then, Bitcoin vaulted to historic highs, briefly touching $20,000 on Dec. 17. Since then clients, friends, relatives and yes, even my mother-in-law, have asked me if I thought crypto currencies were a good investment.
The answer will always depend on the price I'm willing to pay for something. Until now, I have simply sat back and watched as the mania unfolded. Today Bitcoin is down almost 50 percent from the highs. Many financial historians have compared the run-up (and decline) in crypto currencies to the great Tulip Bulb Mania of the 17th century. Back then, one tulip bulb in Holland was said to be worth 10 times the annual income of a skilled craftsman. The craze ended in disaster for one and all.
Since even I am not old enough to remember the Tulip Bulb craze, let's look instead at the Dot-Com boom and bust. I do see a lot of similarities between the insatiable demand for anything with Bitcoin, crypto or Block chain in the name today, and companies in the early 2000s that doubled and tripled simply by changing their name to something "techy."
The question to ask is whether or not crypto currencies represent anything more than "animal spirits." In a global market where just about every other investment vehicle is gaining ground, why not Bitcoin? In other words is it simply part of the "greater fool theory" where you're buying Bitcoin simply to sell it at a higher price to someone else?
The crypto cheerleaders will tell you that investments like Bitcoin are real. The currency can be used to purchase things, products, etc. Another argument-the scarcity of crypto currencies compared to the world's traditional currencies. Others say the block chain technology that drives Bitcoin and other crypto currencies is "secure" because the underlying technology records and verifies every transaction using exact copies of a database spread on computers all over the world.
Some of those arguments may hold water, but not all of them. The fact is that it is notoriously difficult to buy anything with this stuff. The currency network is slow and buying anything small takes a lot of effort and time. Besides, who would want to spend this electronic money on a television or cup of coffee when next week the price might be 20 percent higher than it is now?
The fact that more and more crypto currencies are popping up kind of flies in the face of the "scarcity" argument. There is nothing to prevent an inexhaustible amount of these currencies to flood the world over time. And just because no one has figured out how to hack the block chain technology doesn't mean that they won't.
There have been several cases already where millions in crypto currencies have been stolen or hacked throughout the world. Finally, various governments are bound and determined to either regulate this free-wheeling market, or shut it down completely. In this example, China and South Korea come to mind.
While the controversy rages, crypto currencies will continue to trade and plenty of money will be made on both sides of this market. It appears that as time goes by, technical analysis is beginning to work in assisting traders in determining which way these currencies are going, at least in the short term. Right now, the betting is that Bitcoin will bottom out around here, only a little below the price where it traded overnight ($9,969).
|Write a comment - 0 Comments|
@theMarket: Melt-Up Continues
It's been the best two weeks for the U.S. markets in decades. Investors seemingly can't get enough stocks in their portfolios, no matter how high the indexes climb. Ain't it grand?
Over the past few weeks, I have explained in detail that the stock market is in "melt-up" mode. You may think it's crazy, or that the gains are a result of excessive exuberance. You may even be sitting there with your arms crossed, pointing your finger at me and predicting this is all going to end badly for investors. That's fine, provide as many opinions as you like, but stay invested in the meantime.
Some ask me how you can have the U.S. dollar declining, while interest rates and stocks climb at the same time. Then there are the commodities — gold, basic materials, mines and metals — all moving up with stocks. Is there, in fact, anything except bond prices that are down?
Some of the movements can be explained by expectations that inflation will be rising in the future, based on the added stimulus of the Republican tax reform. The rise in interest rates anticipates what the Fed might do as a result of rising inflation (raise rates faster than expected). The lower dollar may also signify that bond investors may be able to get a better return on their money by investing in foreign markets outside the U.S.
Of course, all of the above trends can reverse on a dime next week, since no one really knows what impact the tax cuts will actually have on the economy. The interesting thing I have noticed since the beginning of the year has been how opinions on what is in store for the markets this year seems to have solidified.
In one corner, we have the doomsayers. The tax cut was unnecessary and will screw up the Fed's carefully planned interest rate model of gradually raising rates and reducing bond purchases. They fear that rates will need to rise faster to head off the inflationary impact of tax cuts. The markets will collapse as a result and the second half of the year is not going to be pretty.
No, no, say the Trumpsters and their followers. The tax cuts are going to "Make America Great Again." Jobs will be plentiful, GDP will grow even faster (by 3 percent or more), that earnings will accelerate, both as a result of huge tax savings, as well as by an ever-growing economy. As for inflation, well, it seems to be behaving itself thus far, so why worry about it until we have to?
At our firm, we pride ourselves on a contrarian outlook. We go left when others go right and vice versa. As such, we like to follow investor sentiment as it pertains to the stock market. The recent "Investor Intelligence" numbers (which measure such things) indicate the percentage difference between those who are optimistic about the future direction of the market, and those who are pessimistic, have reached the highest level since 1986. Only 13.5 percent of investors expect the market to decline.
This overly-optimistic view is a sobering statistic. The level of optimism is even greater than it was just before the 2008 crash. It has always indicated an extremely overbought condition in the stock market. For people like me, it provides a contrarian view that is invaluable in times like this. However, investor sentiment is not the only variable that we (or you) should watch.
Things like: how expensive are the markets versus earnings expectations? At the present level of interest rates, could valuations simply be considered fairly-valued? The Trumpsters could have it right. The markets may actually be undervalued if all turns out well on the tax cut front.
That is the reason why I have urged readers to stay invested throughout all of last year and into today. Sure, somewhere down the road (maybe even tomorrow) something will come along to knock the markets down anywhere from 3 percent to 10 percent. So what?
Don't try to time it. It is just too hard to predict what central banks will do next. What a non-politician in the White House will do or not do, or when this bull market will peak. If you have money to invest, start investing it a little at a time. You may be lucky in your timing and actually catch some of the long-awaited down draft, but don't get cute, or you may find yourself on the sidelines while the market gains another 10 percent.
|Write a comment - 0 Comments|
The Independent Investor: The Cost of MAGA
It is the guiding principle behind the Trump administration, but to "Make America Great Again" the U.S. may have to break some eggs. Are you ready for that?
"MAGA" is much more than a marketing gimmick. Almost every day, we uncover additional evidence of how the President and his supporters in Congress are dismantling regulations, taxes, and on the foreign front, trade deals.
For example, while the president professes to have "a great relationship" with China and admires its president, Xi Jinping, at the same time, he is working behind the scenes to apply more pressure to our sometime-friend, sometime-nemesis.
This week we will have surely upset China when the House passed two bills that will make it easier for high-ranking Taiwanese officials to exchange visits with counterparts in the U.S. The second bill would promote Taiwan's participation in the World Health Organization.
Mainland China has long held a policy of "One China" (since 1949). The Communist government considers Taiwan a rebel province, which will one day be reunified with the mainland, even if that means applying military force. The U.S. actions this week threaten that stance and could invite some kind of retaliation from the mainland. Certainly China does not separate trade relations from geo-political concerns. To them, it is all one and the same. Therefore their response could be in the economic sphere or in the political realm (less pressure on North Korea).
On the trade front, many global trade economists believe that 2018 will be the year when Trump takes the gloves off when it comes to China. In December, Trump unveiled his national security plan and identified Russia and China as rivals that are attempting to erode American security and prosperity. He specifically accused Beijing of unfair trade practices.
There are plenty of areas ranging from steel to intellectual property where America has expressed their trade grievances. Politicians like to use the trade imbalance with China as justification (now about $309 billion in their favor) for additional tariffs on Chinese goods, but that line of discussion is too simple and ignores the vast and tangled economic relationships we have with that country.
Our withdrawal from the TPP Southeast Asian trade agreement has also left us with less clout when negotiating with China. In many ways, we are now on our own, as opposed to being the lead player in a multi-country, Asian trading bloc, when dealing with the Chinese. In fact, China is trying to replace the U.S. in that particular trade group, which could strengthen their position and cause us even more difficulties.
As of today, we have yet to feel any real fallout from our MAGA moves, but they are coming. Just this week, the markets tumbled worldwide when an unnamed Chinese official intimated that China might slow down, or stop purchasing altogether, our U.S. Treasury bonds. The concern was understandable, since China is the largest foreign purchaser of our debt. Other officials quickly denied the statement, but it reveals how dependent global financial markets are on maintaining the status quo in world trade.
And it is not only China that we need to contend with. This week, according to some Canadian trade officials, the North American Free Trade Agreement (NAFTA) is reported to be on the rocks. If that is true, the implications would be huge. No one can predict what would happen as a result of the dissolution of NAFTA, but suffice it to say that it would not be good for the stock markets of Mexico, Canada or the U.S. The three currencies involved have already seen some wild gyrations. When long-standing trade deals change, dislocations should be expected. There will be winners and losers, some obvious but others may take years to discover.
An enormous number of companies on both sides of our borders would be impacted. Hundreds of thousands of jobs would also be affected in ways that analysts are only just beginning to study. The same downside (and upside) exists in our relationship with China and every other country where our MAGA policies will impact trade agreements.
Financial markets hate uncertainty. Financial markets at historical highs dislike uncertainty even more. Aside from backing out of the TPP and bowing out of the world's climate change initiative, nothing substantial has come out of the president's first year in regard to trade. That doesn't mean it won't. As 2018 gets going, be aware that there are trade risks out there that we are only beginning to comprehend. Let's hope the president gets it right.
|Write a comment - 0 Comments|
@theMarket: Look! Up in the Sky! It's a Bird ... It's a Plane ... It's the Stock market!
The Dow Jones Industrial Average gained a thousand points in a month. In just the first three days of 2018, all three U.S. averages hit consecutive record highs. Overseas indexes did even better.
Japan, for example, was up more than 3 percent on its first trading day of the year. Emerging markets continue to make new highs, while European bourses continue to climb. Those who expected the markets to tank in the New Year have thus far been wrong. How long can this last?
Short sellers, convinced that stocks just have to come down, bet on a market decline and have had their head handed to them on a daily basis. Undeterred, they point to the "overbought" indicators that have been flashing red for weeks now. Investor sentiment numbers continue to climb to nose-bleed levels as well, which is usually a contrary indicator. Still, the markets climb higher.
There is an old saying among traders that "the markets can remain irrational, longer than you can remain solvent." It is something that all investors should not forget. We are experiencing a melt-up and if one is on the bull train, remain on it. If, on the other hand, you still have that yearly cash bonus, practice a little patience. There will come a time when you can put that new money to work, just not quite yet.
We are in a period of goldilocks-type conditions that one rarely sees in the stock market. We have low, even historically low, interest rates given the growth rate of the global economy. Negative interest rates in a large part of the world are coupled with accelerating growth. At the same time, the U.S. economy, which has been growing moderately, may now get a new burst of energy thanks to the newly-passed tax reform. If our Twitterer-in- Chief is correct, the $1.5 trillion in tax cuts for one and all will create a robust environment for additional consumer spending as well as capital investment.
The U.S. could therefore act as a speeding locomotive pulling the rest of the world's economies along at an ever-increasing rate. It is similar to what happened back in the early 2000s when China's economy exploded. Almost every nation on earth benefited from that economic miracle. Some think this could happen again, only this time to the U.S., under the Trump presidency.
Maybe a simpler answer for today's market gains lies in the fact that we are entering a new stage of the market's emotional cycle. We call it the optimistic stage, where prices rise as new capital is put to work by current market players, as well as by new market participants, who have been on the sidelines.
It is difficult to predict the length of this phase (if it has truly begun) because it is dependent upon the success of that invested capital, as well as the time required to generate a positive rate of return for this risk capital.
One highly-respected, gray-haired sage of stock markets I respect is Jeremy Grantham, founder and chief Investment officer of Boston-based Grantham Mayo Van Otterloo. In his company's latest investment letter, Grantham believes we are currently showing signs of entering the blow-off or melt-up phase of this bull market.
"I recognize on one hand that this is one of the highest-priced markets in U.S. history, he writes. "On the other hand, as a historian of the great equity bubbles, I also recognize that we are currently showing signs of entering the blow-off or melt-up phase of this very long bull market."
He adds that the end of this phase could take anywhere from another six months to two years to complete before all is said and done. Before we do, we should expect the final emotional stage of the market to unfold. That is when euphoria takes over and stock prices reach their zenith. Parabolic price gains become the norm and a false feeling of well-being occupies the investor psyche. But don't worry, I see no signs of this occurring as of yet. So enjoy your gains and expect more in the future.
|Write a comment - 0 Comments|