PGM Capital – Blog
27Aug/160

Welcome to the Negative Interest Rate World

By Eric Panneflek

Dear PGM Capital Blog readers,

In this weekend blog article we want to elaborate on the fact that the value of negative-yielding bonds - both government and corporate - swelled to US$13.4 trillion this week as negative interest rates and central bank bond buying ripple through the debt market.

INTRODUCTION:
In market economies, money is the measure of the value of goods and services, and the interest rate is the price of money itself. When the price is zero, it makes no difference whether money is kept under a mattress or lent, because there is no cost to holding or borrowing cash.

Policy makers in both Europe and Japan in order to prevent their respective economy to slide back into deflation, or a spiral of falling prices that could derail the economic recovery, chose to experiment with negative rates before turning to a bond-buying program like those used in the U.S.A.

But how can the price of money – which, after all, makes the world go round – be zero? And how can it possibly ever become negative?

Negative rates means that the lender pays the borrower for the privilege of lending money.

Yes, you read that right. You lend money to an entity and will not earn any interest. In fact, you will get back less money than you lent when the bond matures, which is where the ‘negative’ part comes into play.

Only bad things, like toxic waste, have a negative price, the equivalent of a fee payable to anyone willing to make them disappear. Does this mean that negative interest rates embody a new perspective on money – that it has gone “bad”?

PGM CAPITAL ANALYSIS AND COMMENTS:
The talk of negative rates has spread also to the USA, with Fed Chairwoman Janet Yellen, failing to take them off the table, at a recent congressional hearing.

Negative interest rates are an act of desperation, a signal that traditional policy options have proved ineffective and new limits need to be explored. They punish banks that hoard cash instead of extending loans.

History never looks like history when you’re living through it, but this is the first time in at least 5,000 years we have driven interest rates below zero.

If you were dropped to earth for the first time ever, how would you objectively view the current 10-year government bond yield environment?

  • USA: 1.36% on July 5, the lowest level in American history
  • Great Britain: 0.52%, on August 12, a 322-year low
  • Japan: -0.27%, on July 27, 2016, the lowest level in Japan's history
  • Germany: -0.17%, record low on July 8, 2016
  • Italy: 1.03%, on August 12, 2016, the lowest level in Italy's history
  • Switzerland: -0.63%, record low on July 11, 2016

With this low to negative yields, Investors have to take bigger risks if they want to returns of 2 decades ago.

Below chart shows a portfolio breakdown of an investor in 1995, 2005 and 2015, who want to have an average return on investment of 7.5 percent per year.

Bond guru Bill Gross of Janus Capital thinks the surge in negative yielding bonds around the world will have dire consequences:

“Global yields at lowest in 500 years of recorded history. US$10 trillion of negative rate bonds. This is a supernova that will explode one day.”

The World Gold Council is more gentlemanly about it, in a statement they've said:

“Bonds generally help balance the risks inherent in portfolios. Low yields, however, not only promote risk taking, but also limit the ability of bonds to cushion pullbacks in stocks and other risk assets in investment portfolios.”

We believe that the surge in demand for bonds has pushed prices and valuations into bubble territory. Investors should be reminded that Bubbles never last and that Sooner or later, a crash is inevitable.

Which means, that if you take away the safety and yield on Treasuries, what do you have left?

An I.O.U. from a central banker.

Based on this we believe that any responsible investor has to keep in mind that the bond market is roughly twice the size of the stock market, excluding derivatives, which means that an exodus could get ugly.

History shows that gold has been part of every major financial reset, since at least the Roman times. It will be no different this time.

Despite what you may think about gold, it is a 3,000-year safe haven that has zero default risk, is just as liquid as a bond, and will be a natural landing spot for beat-up bond and equity investors. And if held privately in physical form, it has no counterparty risk.

Last but not least, before following any investing advice, always consider your investment horizon, risk tolerance and financial situation and be aware that markets can remain longer irrational than that you can remain solvent and that prices of precious metals and the stock of their producers might be very volatile and that sharp corrections may happen in the short term.

Until next week.

Yours sincerely,

Suriname Times foto

Eric Panneflek

20Aug/160

Gurus are bearish on the S&P-500

By Eric Panneflek

Dear PGM Capital Blog readers,

On Monday, August 15, regulatory filings with the U.S. Securities and Exchange Commission showed that in the second quarter of 2016, billionaire investor George Soros and Carl Ichan have increased their bearish bet against the USA Stock Market.

GEORGE SOROS:
Billionaire investor George Soros, who rose to fame and fortune by betting against sterling in 1992, on Monday showed his latest hand: nearly doubling down on his bearish bet against the S&P-500.

The 86-year-old’s fund, Soros Fund Management LLC, disclosed in a regulatory filing it had increased its bet against the S&P 500, by adding 1.9 million shares of the SPDR S&P 500 ETF (NYSE: SPY), which is almost double of his 2.1 million puts shares as of March 31 of this year.

So he owns now just puts of over 4 million shares of the exchange-traded fund which is also his fund’s biggest holding in the filing too.

Puts are used for a downside bet. Buying these S&P 500 puts, essentially gives Soros the right, but not the obligation, to sell them in the future.  In other words, if the S&P 500 or the ETF that tracks falls, Soros should make a nice profit.

CARL ICHAN:
Legendary Investor Carl Ichan, recently said in an interview:

“I have hedges on, I’m more hedged than I ever was. The market is way overvalued at 20 times the S&P and I’ll tell you why: a lot of it is a result of zero interest rates.

That’s going to be hurt.  There’s going to be a day of reckoning here.  I’ve seen it many times in my life.  When things look good, they look great.  You go into the sky.  But that’s when you have to really pull down and really stop buying.”

Billionaire Carl Icahn, hedge fund, Icahn Enterprises (NYSE: IEP) had kept on its record short bias, manifesting in a net -149% market exposure as can be seen from below chart.

PAUL TUDOR JONES:
Tudor Investment Corp, the hedge fund belonging to Paul Tudor Jones, the "legendary macro trader" as defined by Bloomberg, which reported Tuesday August 16, that it had fired 15% of its employees, and which is now said to be implementing minimum risk levels and urging its traders to take on much more risk to stem the losses.

It was interesting, because it revealed that Paul Tudor Jones is even more bearish than George Soros (and perhaps even of Carl Icahn), based on the surge in the fund's S&P puts, which rose from US$490 million notional to US$1.7 billion notional, a nearly four-fold increase, and making it the biggest such position in the fund's history, dwarfing the $301 million in notional calls the fund had on at the same time.  This was the biggest delta between Tudor's puts and calls on record.

PGM CAPITAL ANALYSIS AND COMMENTS:

Billionaire Carl Icahn, for example, recently threw up a red flag on broadcast in the USA, when he declared,

“The public is walking into a trap again as they did in 2007.”

Unfortunately, Icahn’s warning is tame compared to his peers.

Andrew Smithers, the chairman of Smithers & Co recently said:

U.S. stocks are now about 80% overvalued,

He backs up his prediction using a ratio which proves that the only time in history stocks were this risky was 1929 and 1999. And we all know what happened next. Stocks fell by 89% and 50%, respectively.

But the most warning of them all is an article by ZeroHedge in which they stated that the Rothchilds currently are buying gold.

In the article is stated that:

The Rothschilds are buying gold through their investment house RIT Capital Partners and Lord Jacob Rothchild is warning about the results of “the greatest experiment in monetary policy in the history of the world”.

British investment banker Lord Jacob Rothschild pictured with Joanna Lumley. (Source: Getty)

Rothschild also said:

"To date quantitative easing has successfully driven stock markets higher, but he rightfully fears this will not go on forever. He adds that a number of headwinds could also derail markets - including the very uncertain geopolitical risk."

The Rothchild's investment house has increased its allocation to gold by 8% and aggressively sold quoted equities and sterling to navigate choppy “uncharted waters” post-Brexit. Sale of shares have been used to buy gold and other non-disclosed precious metals, which, at the end of June accounted for 8 per cent of the £2.8 billion portfolio according to the trust's half-year results, released on Tuesday August 16.

We believe that chances of the biggest market crash and a global reset is bigger than most people can imagine and that history has proven that Gold, Silver and other precious metals are the only insurance for ones wealth in times of uncertainties.

Last but not least, before following any investing advice, always consider your investment horizon, risk tolerance and financial situation and be aware that markets can remain longer irrational than that you can remain solvent and that prices of precious metals and the stock of their producers might be very volatile and that sharp corrections may happen in the short term.

Until next week.

Yours sincerely,

Suriname Times foto

Eric Panneflek

14Aug/160

Why Investing in Potassium & Lithium can be Lucrative

By Eric Panneflek

Dear PGM Capital Blog readers,

In this weekend's blog edition, we want to elaborate on the increasing usage of Potassium and Lithium in our modern society and the best way to invest in them.

POTASIUM:
Potassium is a chemical element with symbol K, with atom number 19, and is an alkali metal used mainly in the fertiliser industry.

The principal use of potash is as an agricultural fertilizer (plant nutrient) because it is a source of soluble potassium, which is one of the three primary plant nutrients required for plant growth and maturation; the others are fixed nitrogen and soluble phosphorus.

In addition to its use as a fertiliser, potassium chloride is important in industrialised economies, where it is used in aluminum recycling, by the chloralkali industry to produce potassium hydroxide, in metal electroplating, oil-well drilling mud, snow and ice melting, steel heat-treating, and water softening.

Potassium hydroxide is used for industrial water treatment and is the precursor of potassium carbonate, several forms of potassium phosphate, many other potassic chemicals, and soap manufacturing.

Potassium carbonate is used to produce animal feed supplements, cement, fire extinguishers, food products, photographic chemicals, and textiles.

It is also used in brewing beer, pharmaceutical preparations, and as a catalyst for synthetic rubber manufacturing.

Generally, these nonfertiliser uses have accounted for about 15% of annual potash consumption in the United States.

Top 3 Producing Countries:
The top 3 potash-producing countries are:

  • Canada:
    Total mine production of 11 million Metric Tons in 2014-2015, for which the country is home to the world’s largest fertiliser company by capacity, Potash Corporation of Saskatchewan, (POT.TO) or PotashCorp.
    However, the company has recently been forced to shutter two of its potash mines in Canada due to low prices.
  • Russia:
    Russian potash production also stayed fairly flat from 2014 to 2015, rising an estimated 20,000 MT to 7.4 million MT. The country is home to some of the world’s largest-known potash reserves.
    Last year, Industrial Minerals reported that Industrial and Commercial Bank of China (1398.HK) and China Construction Bank (0939.HK) engaged in a loan deal worth over $500 million with Russian potash company Uralkali (OTCMKTS:URAYY).
    The move gave China greater control over global potash production, as Uralkali is responsible for 20 percent of the world’s potash output.
  • Belarus:
    Belarus boosted its 2015 potash production to overtake China as the world’s third-largest potash producer in 2015. It put out a total of 6.5 million Metric Tons of potash for the period.
    The country has historically been a major player in the global potash market. In 2014, marketing agreements between Belarusian and Russian producers dissolved, according to the USGS. This shift lessened potash producers’ collective bargaining power, and contributed to the recent decline in the potash price.

LITHIUM:
Lithium is a chemical element with the symbol Li and atomic number 3. belonging to the alkali metal group of chemical elements.

Lithium production has greatly increased since the end of World War II. The metal is separated from other elements in igneous minerals. Lithium salts are extracted from water in mineral springs, brine pools, and brine deposits.

Worldwide identified reserves in 2008 were estimated by the US Geological Survey (USGS) to be 13 million tonnes, though an accurate estimate of world lithium reserves is difficult.

Deposits are found in South America throughout the Andes mountain chain. Chile is the leading producer, followed by Argentina, for which the company "Sociedad Quimica y Minera de Chile S.A." (NYSE: SQM) is world biggest producer of Lithium.

Late in the 20th century, lithium became an important component of battery electrolytes and electrodes, because of its high electrode potential. Because of its low atomic mass, it has a high charge- and power-to-weight ratio.

Below table shows the world's top eight producers in 2015 and reserves in metric tons by country:

PGM CAPITAL ANALYSIS AND COMMENTS:

Potassium:
The potash price has been on the decline since 2013′s cartel breakup between Russia and Belarus, but the amount of potash on the world market is still expected to increase over the next few years.

Specifically, the US Geological Survey (USGS) sees global potash production capacity reaching 61 million MT by 2019, up from 52 million MT in 2015.

The demand for the fertilizer is expected to increase over the long term. In 2015, the world consumed 35.5 million MT of potash, and that number should grow to 39.5 million MT over the next four years.

Potassium is associated with movement of water, nutrients, and carbohydrates in plant tissue. If potassium is deficient or not supplied in adequate amounts, growth is stunted and yields are reduced. Various research efforts have shown that potassium:

  • Stimulates early growth
  • Increases protein production
  • Improves the efficiency of water use
  • Is vital for stand persistence, longevity, and winter hardiness of alfalfa, and
  • Improves resistance to diseases and insects.

These roles or functions are general but all are important to profitable crop production as can be seen from below table.

Interpretation
Crop Part
Sampled
Time of
Sampling
Deficient Low Sufficient High Excessive
- - - - - - - - - - - - - - - - - - % K - - - - - - - - - - - - - - - - -
alfalfa top 6 inches bud <1.8 1.8-2.4 2.5-3.8 3.9-4.5 >4.5
barley whole plant head
emergence
<1.25 1.25-1.49 1.50-3.00 >3.00 -
corn ear leaf silking <1.30 1.30-1.70 1.80-2.30 2.40-2.90 >2.90
soybean most recently
matured trifoliate
early
flower
<1.30 1.30-1.70 1.80-2.50 2.60-4.50 >4.50
wheat whole plant head
emergence
<1.25 1.25-1.49 1.50-3.00 >3.00 -

Lithium:
A typical lithium-ion battery can generate approximately 3 volts per cell, compared with 2.1 volts for lead-acid or 1.5 volts for zinc-carbon cells. Lithium-ion batteries, which are rechargeable and have a high energy density, should not be confused with lithium batteries, which are disposable (primary) batteries with lithium or its compounds as the anode.

Other rechargeable batteries that use lithium include the lithium-ion polymer battery, lithium iron phosphate battery, and the nanowire battery.

A recent study looked in great detail at how Lithium is used to produce batteries, and the entire life cycle of the batteries.

The findings were compared to the environmental impact of conventional internal combustion cars. The study measured environmental impact in a number of ways, including global warming potential, cumulative energy demand, an Ecoindicator 99 and an Abiotic Depletion Potential that measures resource depletion.

Interestingly, the study found that the environmental impact of Lithium was relatively small, but that other elements of these batteries have a higher impact.

For example, lithium batteries take a tremendous amount of copper and aluminum to work properly. These metals are needed for the production of the anode & the cathode, cables and battery management systems. Copper and aluminum have to be mined, processes and manufacturing which takes lots of energy, chemicals and water which add to their environmental burden.

Based on their fundamentals we have a BUY rating on the producers of Potassium and Lithium mentioned in this article.

Last but not least, before following any investing advice, always consider your investment horizon, risk tolerance and financial situation and be aware that prices of metals and the stock of their producers might be very volatile and that sharp corrections may happen in the short term.

Until next week.

Yours sincerely,

Suriname Times foto

Eric Panneflek