Just before year\u2019s end, Saxo\u2019s Head of Equity Strategy Peter Garnry wondered whether 2024 can once again surprise everyone.<\/p>\n
Consensus, he said, is increasingly on \u2018a mild recession in the US\u2019 somewhere around mid-year.<\/p>\n
Under the assumption that consensus is always wrong, this leads to two paths in 2024.<\/p>\n
1) A \u2018hard landing\u2019 scenario as high interest rates finally bite; or<\/p>\n
2) A re-acceleration of growth in the global economy.<\/p>\n
Michael Gable from Fairmount Equities takes up the argument.<\/p>\n
\u00a0<\/p>\n
\u201cInflation, enemy number 1, is on the way down. The trend continues to not only head in the right direction, but it is falling faster than markets had expected,\u201d Michael says.<\/p>\n
\u201cWas it transitory after all?\u201d<\/p>\n
\u00a0<\/p>\n
Headline inflation came in at 2.4% for the year.<\/p>\n
Core CPI 3.6%.<\/p>\n
Lower than expected and still falling.<\/p>\n\n
\u00a0<\/p>\n
Aussie Monthly CPI was expected to be 5.2% in October after rising 5.6% in Sept.<\/p>\n
It came in at 4.9%.<\/p>\n
Michael says if the monthly CPI averages 0.3% in Nov and Dec (which is the average of the last three months), then year on year inflation will fall to 3% yoy by December.<\/p>\n
This is because +0.9%mom and +1.5%mom from Nov & Dec 2022 will drop out of the calculations.<\/p>\n
\u201cThat is, in a couple of months from now, inflation could fall sharply into the top end of the RBA\u2019s target,\u201d Michael says.<\/p>\n
\u201cImagine that?\u201d<\/p>\n
Source: AMP<\/em><\/p>\n \u00a0<\/p>\n Annual inflation come in at 3.1% for November, down from 3.2% in the prior month.<\/p>\n Core inflation was unchanged at 4%.<\/p>\n Above where it needs to be, but clearly falling.<\/p>\n\n Rising bond yields recently caused havoc with the market.<\/p>\n But Mike says they tend to \u2018go up in straight lines and come back down in straight lines.\u2019<\/p>\n \u201cThere has never been a sideways path or a \u2018higher for longer\u2019. US two years are now down massively from their recent peak as rate cuts next year look increasingly likely.\u201d<\/p>\n\n \u201cThe Australian 3-year, which is a proxy for where our interest rates should be, are now lower than the cash rate and falling,\u201d Gable says.<\/p>\n \u201cWeaker than expected CPI and GDP has flipped expectations of a local rate rise in 2024 into expectations of a rate cut.\u201d<\/p>\n\n \u00a0<\/p>\n The US ISM is the most reliable PMI for gauging the strength of the US economy, according to Fairmount.<\/p>\n Source: Trading Economics<\/em><\/p>\n The ISM Services PMI recently increased to 52.7 in November 2023 from 51.8 in October, beating forecasts of 52. A reading above 50 indicates expansion.<\/p>\n \u201cThat\u2019s to say, the data is not indicating a recession is on the way. As we can see on the chart, the PMI is forming a trough, (which proves what I have been saying for months now), and this is the time when you get the biggest moves in the share market.<\/p>\n \u201cNot when PMI is very high, but when it is low and starting to head up again.<\/p>\n \u201cWith falling CPI, one may suggest that the US economy is in a sweet spot, no recession, but not running too hot. We can make ourselves sound smarter by saying that the market is wrong and soft landings are impossible, but we are here to analyse the data and try to make money from it, not look smart for the sake of it.\u201d<\/p>\n Perhaps things will<\/em> work out after all?<\/p>\n \u00a0<\/p>\n Interest rates and gold have always tended to move in opposite directions.<\/p>\n Over the past few years, however, this relationship has broken down a bit \u2013 with interest rates heading higher and gold prices holding up, Michael says.<\/p>\n \u201cThe difference this time is central bank buying. Last year, central banks accumulated 1136 tonnes of gold, which is a record.\u201d<\/p>\n Year to date, central bank gold purchases are up 14% compared to last year, with China being the most significant buyer.<\/p>\n \u201cWhy are central banks buying? Countries such as China and Brazil are already starting to sell goods to each other as a way to replace the US dollar (the US dollar is unlikely to be replaced as the global currency of course, but that won\u2019t stop some countries from trying to diminish its importance somewhat.)<\/p>\n \u201cTo do this, they will need to settle their current account imbalances using gold. So if gold can hold up in higher rates because of central bank buying, then what can it do when rates fall and central banks continue to purchase?\u201d<\/p>\n\n Mike says it\u2019s also useful to compare the price of gold to the money supply.<\/p>\n \u201cThe (below chart) shows the relationship between the size of the Fed\u2019s balance sheet and the US Treasury\u2019s gold holdings.<\/p>\n \u201cGold is more undervalued today compared to the late \u201960s or \u201990s, which were the last times we saw big increases in the price of gold. So even though gold is up more than 7x in the past 23 years, the Federal Reserve\u2019s balance sheet has grown even faster.\u201d<\/p>\n So\u2026 gold at an all time high is undervalued?<\/p>\n \u201cIn brief, yes, that is clearly possible.<\/p>\n \u201cWith the gold chart looking to break through a long term resistance level right now, don\u2019t be too worried about the day to day movements. I would be looking to see how it trades on a monthly chart, not a daily chart.\u201d<\/p>\n Source: Goehring & Rozencwajg<\/em><\/p>\n \u201cFalling interest rates, central bank buying, over a decade of excess money printing, can mean only one thing for the next few years \u2013 upwards pressure on the price of gold. So forget the daily noise for now.\u201d<\/p>\n \u00a0<\/p>\n \u201cOil is back down to the 15-year average price and I expect it to stablise here and then recover again. Energy stocks are still very much under owned by investors. They account for less than 5% of the S&P 500, well below the historical average of 14%.\u201d<\/p>\n\n However, the outlook by the International Energy Agency (IEA) is gloomy.<\/p>\n Between now and 2040, global energy demand is projected to fall by 3%, despite real GDP capital growing by 40%.<\/p>\n \u201cBy then we will experience rapid growth in emerging markets. When an economy is very poor, it consumes little energy,\u201d Michael reckons.<\/p>\n \u201cAs it reaches middle-income, its energy demand grows materially. The IEA has a history of being pessimistic in its demand forecasts. Ignoring the COVID year of 2020, they have underestimated demand in 12 out of the last 14 years, by an average 820,000 barrels per day.<\/p>\n \u201cGlobal oil markets are already in a structural deficit. Crude demand exceeded production in 2021. Massive releases from the US strategic reserves, driving levels to a 40-year low, have masked this deficit. The US stopped releasing from this reserve in June.<\/p>\n \u201cWhen markets realise that the economy is holding up, oil and gas demand is not in free fall, and supplies are low, the record low investment levels in oil companies will be a thing of the past.\u201d<\/p>\n \u201cPrime Permian acreage that could be bought for US$5000 per net royalty acre a few years ago is now fetching over US$25,000. Exxon has announced it will purchase Pioneer Natural Resources and Chevron will buy Hess, for transactions totalling US$120b.\u201d<\/p>\n The IEA\u2019s projections of lower demand are based on the assumption of improved efficiency.<\/p>\n But Gable says, bluntly \u2013 never has improved efficiency reduced demand<\/em>.<\/p>\n \u201cIn 1865, an English economist, William Jevons noticed that as steam engine efficiency improved, it lead to greater demand for coal, not less. Jevons Paradox concludes that improved efficiency leads to accelerated consumption. Over the past few decades, as cars became more efficient, they have not become smaller and lighter.<\/p>\n \u201cAs it became more efficient to cool or heat your home, houses have not become smaller. And as it become more efficient to fly a plane, we haven\u2019t traveled less.<\/p>\n \u201cAs energy becomes more efficient, we won\u2019t use less of it, we will consume more.\u201d<\/p>\n \u00a0<\/p>\n Talking about oil naturally leads onto talk about uranium and Gable\u2019s been clear on this one.<\/p>\n \u201cLast year there was notable wind and solar projects which were cancelled or delayed due to rising costs. It takes a lot of resources to get a renewable energy project up and running.<\/p>\n \u201cWhen money and energy were cheap, there was progress being made, but the numbers just don\u2019t stack up anymore with higher interest rates and commodity costs.<\/p>\n \u201cThis is why governments are tuning to nuclear power to fill in the gap,\u201d he says.<\/p>\n \u00a0<\/p>\n\n \u201cLooking back over the past 30 years, the fall of the Soviet Union and agreements between Presidents Bush and Yeltsin in the early \u201990s saw uranium from old warheads hit the market and there was excess supply. As producers adjusted, supply fell away, became low again, and then the price of uranium took off in the mid 2000s.<\/p>\n \u201cThis is the classic merry-go-around that we have become familiar with commodities supply and demand.<\/p>\n \u201cThe Paladin Energy (ASX:PDN)<\/strong><\/a> share price soared from about 5c to over $9. As usual, supply caught up after 5 years and prices collapsed. Then in 2011, the Fukushima disaster led to a closure of plants, and the excess inventory from Fukushima was sold into the market \u2013 excess supply meeting low demand, and the uranium price collapsed again.\u201d<\/p>\n It certainly appears as though these stockpiles have been completely worked through.<\/p>\n \u201cFor the first time, uranium is in a structural deficit which will once again take years to correct,\u201d Gable says.<\/p>\n \u201cThe Sprott Physical Uranium Trust, which buys and sells physical uranium, has been only able to source small amounts in recent months, leaving it with about $60m of cash on its balance sheet.<\/p>\n \u201cThat is, a physical backed trust just can\u2019t find enough physical to buy. It would be like a physical backed gold ETF not being able to buy anymore gold and just sitting on the cash.<\/p>\n \u201cMore and more countries are announcing movements back into nuclear energy to meet their zero emission targets, and with almost no uranium around, we could see quite a move in uranium prices for years before supply finally catches up.\u201d<\/p>\n \u00a0<\/p>\n The price of iron ore has surprised all the analysts this year.<\/p>\n \u201cWe have noticed that they have started to slowly move up their very low price targets on the iron ore miners, but they are still skeptical. Once they start becoming bullish, that will add more fuel to the big miners to head higher.<\/p>\n \u201cWe have been bullish on Fortescue (ASX:FMG)<\/strong><\/a> shares all year, noting that a break above $23 will lead to levels in the high $20s. That is now happening but all the other analysts are still slow to react.<\/p>\n Michael says recent comments by the Vale CEO suggest that the market will be tight for a while yet.<\/p>\n \u201cChinese PMIs have looked weak but they clearly are numbers that need to be taken with a pinch of salt, or to put it a bit more honestly, the numbers can\u2019t be trusted. Chinese stimulus is clearly working behind the scenes, how else do you account for a 16% spike in the iron ore price in the past 6 weeks?<\/p>\n \u201cIt will only be a matter of time until the market realises that China is recovering.<\/p>\n \u201cWe thought the start of this would have been earlier this year and it has taken longer than we thought, but we are finally getting there.\u201d<\/p>\n\n \u201cWe can also see this bottoming of the Chinese economy through their consumption of copper,\u201d Michael adds.<\/p>\n Dr Copper\u2019s long been regarded as a bellwether for economic growth.<\/p>\n \u201cFor the first eight months or 2023, year on year copper demand is up 11% and most of that is coming from China.\u201d<\/p>\n Chinese demand is up 12% year on year for the first nine months of this year, while out of India, demand is now up 36%.<\/p>\n \u201cOn a days of cover basis, inventories are now at three days, a level which historically leads to near-term price spikes.\u201d<\/p>\n \u00a0<\/p>\n\n Lithium carbonate and spodumene prices have collapsed about 80% this year.<\/p>\n But they are now breaching the top of the cost curve, Michael reckons.<\/p>\n \u201cJust like nearly 10 years ago with iron ore when FMG was back to $2 and on its knees, investors in lithium are wondering when the Chinese \u2018high cost, low quality\u2019 producers will curtail production.<\/p>\n \u201cThe past few weeks has seen the pace of selling pick up and bearish analysts turn more bearish and my recent comments to clients and in the media was that we could be seeing some capitulation in the price. The headlines suggest that demand is lower than expected, and that seems to be the story this year with China\u2019s recovery.<\/p>\n \u201cBut as highlighted earlier, improving PMIs out of the US and Chinese demand for iron ore and copper suggest that we could be at or near an inflection point.\u201d<\/p>\n \u201cThose that closely study lithium supply suggest that there actually hasn\u2019t been a surge in supply during the past year. There have been a number of new projects being announced, which gives the impression of high supply.<\/p>\n \u201cRecent M&A activity in the space also suggests that those close to the ground are seeing the need to add to their exposures before interest returns to the sector. And just in the past few days, we have seen some massive rebounds in lithium stocks which adds more weight to my idea that recent weakness was capitulation and we have seen the lows.\u201d<\/p>\n\n The S&P\/ASX 200 powered ahead throughout the pre-Xmas pewriod.<\/p>\n \u201cLower CPI and lower yields are good for the market. It will help interest rate sensitive stocks in particular. Improving economic activity and lower US yields will also lead to a lower US dollar, which is good for resources,\u201d Mike says.<\/p>\n \u201c2023 has been particularly frustrating, especially the day by day movements. However, when we zoom out and look at the bigger picture then the outlook becomes more exciting. We have essentially been in a \u2018bear\u2019 market for two years. Maybe not by pure definition, but two years of a market that hasn\u2019t trended and hasn\u2019t moved to new highs uniformly across most sectors.<\/p>\n \u201cThose that study markets history will know that these bear markets may go on for two years but they never extend into the third.<\/p>\n \u201cNormally by then markets start trending more normally again as whatever caused the original problem starts to get unwound and we return to normality. We can see here a number of examples where a year or two of consolidation led to the next rally.\u201d<\/p>\n \u00a0<\/p>\n\n In terms of how the charts are looking for the broader market, Fairmount has been saying for months that the overall market has essentially traded sideways for the past two years.<\/p>\n \u201cIt has formed a very clear level of resistance near 7600 and the overall pattern resembles that of an \u2018inverse head and shoulders\u2019.<\/p>\n \u201cThis means that we are looking for our market to retest that 7600 level. Because that level has been in place for so long, when we get an eventual breakout, the result will be a very powerful move. It is similar to our view that when FMG finally gets above $23, then it would lead to a powerful move.<\/p>\n \u201cIn the case of the market, as I\u2019ve been saying since earlier this year, a break above 7600 could see the market swiftly move to over 8000 and this is likely to occur in 2024.\u201d<\/p>\n \u00a0<\/p>\n\n \u201cAll this means that I am looking forward to what lies ahead in 2024.<\/p>\n \u201cWe are starting to see a lot of the uncertainty from this year around interest rates, inflation, etc start to give way so this will lead to more reliable moves in the market especially in those sectors mentioned above.<\/p>\n \u201cUsually the first year of a recovery is the strongest so now is the time to really get stuck into making the most of it.\u201d<\/p>\n The views, information, or opinions expressed in the interviews in this article are solely those of the interviewees and do not represent the views of Stockhead. Stockhead does not provide, endorse or otherwise assume responsibility for any financial product advice contained in this article.<\/em><\/p>\n <\/span><\/p>\n The post 2024: Everything Everywhere All at Once<\/a> appeared first on Stockhead<\/a>.<\/p>","protected":false},"excerpt":{"rendered":"The US<\/h2>\n
<\/h2>\n
Bond yields peaking<\/h2>\n
The US ISM PMI<\/h2>\n
Gold<\/h2>\n
Oil<\/h2>\n
Uranium<\/h2>\n
Iron ore and copper<\/h2>\n
<\/h2>\n
Lithium<\/h2>\n
<\/h2>\n
The share market and looking out to 2024<\/h2>\n
<\/h2>\n
Wrapping into 2024<\/h2>\n