A Pivotal Change Afoot

Michael: China is so interesting. I know you’ve written about this but they’ve got social unrest, they’ve got a bigger debt problem and it’s in a more precarious position than I think many in the west appreciate.

Jack: Yes I think this one is finally coming to fruition. Ever since we’ve seen a decline in global demand from the credit crunch it has not returned. So they’ve pumped up their stuff internally and some people say their debt to GDP is up around 80% even though their official debt is 20%. But that’s not even the biggest problem. At the margin they need to continue to feed credit into that system in a very big way, because the US consumer is going back into his shell again. So that pressure is growing tremendously, they are basically out of places to run with that money, they have massive over capacity as we now in real estate and property, massive over capacity in major industries that have carried them through without this demand. So now with this inflation problem they have to pull back on credit and at the margin that has a very bad effect when you have over supply that’s needing a feeding of credit continuously to keep it up. So that’s why I say I think were getting very very close here to a real problem.

Michael: Does that make you worried about the commodity bull market?

Jack: It does, it does to a large degree.

A Pivotal Change Afoot

Michael Campbell: Did we solve the Greek crisis this week?

Jack Crooks: No we did not. Plenty to go there and I think they’re inevitably going to default.

Michael: These ebbs and flows from the short term solutions that come out of this Greece Crisis, these fast reactions when money suddenly comes to the risk side of the equation as you write about. How does an investor make sort of sense of this? Is short term trading all we have left in this one because of the gyrations and the volatility?

Jack: It’s a great point and it’s tough to make sense of it, because all the fundamentals suggest it’s really game over for that area. It’s also getting worse when you look at Italy potentially coming on board, Spain and Ireland in trouble as spreads are blowing out there too, also Portugal. So it makes no sense fundamentally, and I think there’s a lot of games going on to prop it up there. There’s a lot of vested interest to keep the euro up by the banks, because ultimately this whole problem with Greece and the other countries its banking crisis potential for Europe. As I said, I think there’s a lot of games being played there.

Michael: You were absolutely on the leading edge of this when you told our audience several years ago about a coming Greek crisis. You also said you didn’t see how the euro longer term would survive. Are you still of that view?

Jack: I am I am very much of that view because the periphery countries look like they are going to have to come out (of the Euro – Ed). George Soros talked about this last week, that there has to be a mechanism for them to come out because when they have to compete with the likes of Germany, they just can’t do it. So they’ll never be able to create wealth.

Secondly, the incentives for Germany to continue to subsidize the system are going away because they are seeing more and more export demand from the likes of China, Russia and other places. So they are losing their need to subsidize this, so I think it does come apart eventually.

Michael: So that’s what should be in the back of our minds as a longer term issue. One of the things I think people have difficulty with Jack, correct if I’m wrong but I say there’s only three major games in town if you’ve got a monster pool of capital. You’ve got to have Euros, the US or yen. The Canadian dollar, Australian and New Zealand currencies are certainly worth trading and playing, but when the big movements come, for example if there is a shock wave through Europe, the US dollar becomes a big beneficiary because there’s no place else for that major amount of money to go into. I also think that other than some problems like moving money back to Japan to pay off debt or reinvest in the infrastructure problems they’ve had after the earthquake, the yen doesn’t even seem to be part of that equation anymore.

Jack: You’re exactly right, I think that’s part of the euro flow. The repudiation of the dollar is just reflected in the strength in the euro as you said, because it has on such a relative basis deeper capital markets. So the money has to go there. What’s also interesting and we’ve talked about this before, it’s hard to get diversity in currencies now because it’s all one market basically. Most of these currencies are all tied to what the stock market’s doing, so it’s a very fascinating thing. The fundamentals aren’t as in play here at all, so hopefully that may change a bit.

Michael: I remember you talking with us, I think it was December of 2008 when the euro was about 1.50 or 1.60 that you were getting out of the euro and getting into the Singapore dollar. That was a massively successful trade. Is there a trade that you’ve got your eye on right now? Is there anything on your radar screen right now, something that you might be waiting for a proper trade set up but something you think is probably coming down the pipe?

Jack: Yes, in fact we think the Australian dollar could be in very very big trouble. We’ve talked about China before, been wrong , but I think we are getting close on China. If you look at the purchasing managers index (PMI) numbers in China they are starting to turn down in a big way, and Australia very much tracks those Chinese PMI numbers. The companies in Australia are starting to scream about the currency and it doesn’t look like the bank can raise rates again. We think the Australian dollar has the potential to collapse on any real growth problem in China. So that’s really our favourite longer term trade here.

Michael: Does that make you worried about the commodity bull market?

Jack: It does, it does to a large degree.

Michael: I mean it would seem that the commodity bull market has been driven a lot by demand coming out of China and India, that old story but one that has some validity to it in that their global demand has helped the resource side of the market. So if you got a scenario where you had a weakening Chinese demand and a strengthening US dollar due to European problems, I don’t think that’s the recipe most analysts would put together for a stronger commodity boom. Shorter term at least, yes?

Jack: No, not at all. You’re right I think they are going to go hand in hand and that’s part of the Australian dollar call we have. Commodities will come down with it on a relative basis we think fairly hard. In general just a decline in global demand it’s starting to turn over. So you are seeing some capacities starting to loosen up in the commodities market across the board, interesting we saw a big move in risk assets on Friday yet we saw the metals breakdown. We are finally starting to see a little divergence in here that could be telling us something. We’ll find out.

Michael: If you were advising our listeners here, what one or two variables are you keeping your eye on?

Jack: The first thing is really the US stock market. Everything is moving with that, or has been moving so tightly with that. A lot of different asset classes even including bonds in general. So stock market number one and I think we are either very close to the end of this correction or I’m very wrong and we are in for another major blow off. I just don’t see it given the growth tied to global the expectations of earnings tied to global growth that’s turning over everywhere. China Europe and the US, again all at the same time, so I think there could be a big disappointment. Stocks are really the key for us so to keep it simple, watch what happens to the Dow.

Michael:We’ve been talking with Jack Crooks of Black Swan Capital. We just touched on the currency markets in Europe,the US and a few pivotal thing, but .I say Black Swan Capital is a terrific service on a variety of markets, a great daily service that you should checkout .