By Chris Berry (@cberry1)
For a PDF copy of this note, please click here.
It is widely acknowledged that credit is the lifeblood of an economy. It provides the leverage for growth. The interest rate assigned to a fixed income security can then be thought of as the “cost” or “price” of the credit.
This makes sense as lenders want to ensure their assets (cash, typically) earn a return above the risk free rate. To be clear, there is much more to determining an interest rate, but this is the basic premise.
What happens, though, when that rate goes negative?
This note is a primer on negative interest rates, a phenomenon not unheard of, but increasingly en vogue in the wake of the Bank of Japan’s surprising (or maybe not so surprising) announcement to set the interest rate they charge commercial banks to deposit money at the BoJ at -0.1%.
By Chris Berry (@cberry1)
For a PDF of this note, click here.
With few exceptions, deflationary forces are likely to challenge growth in much of the world in 2015. With the global economy more tightly integrated than ever before, the risk of much of the world catching a “disinflationary” or deflationary cold is pronounced. Most commodities are trading at or near five year lows, real interest rates negative in various countries, and Central Banks are having difficulty hitting their (admittedly low) inflation targets of 2%. It’s obvious to even the most casual observer that the inflation genie is not even close to being let out of the bottle.
Given that the global economy is generally struggling to generate “escape velocity” growth, the main question is how deflation might spread? I see three transmission mechanisms:
globalization, high debt to GDP ratios, and innovation in technology spurred by R&D.
This note discusses the first two mechanisms with a focus on China’s efforts to halt the “export” of deflation.
By Chris Berry (@cberry1)
For a PDF version of this note, click here.
Europe has always fascinated me. A thousand years of rich history confront you regardless of the country or city you visit. Opportunities to talk to Europeans from all walks of life about their views on current events or the global financial markets put in a unique historical context are worth the time and effort it takes to plan a trip.
My recent trip to Frankfurt, Munich, Zurich, and Geneva was no exception. I went as a keynote speaker on the Fourth Annual Zimtu Capital Bus Tour where I spoke in each city and served as a moderator and emcee. Accompanying Zimtu were a well-rounded stable of companies representing resources as varied as diamonds, potash, coal, and uranium. Representatives from the Canadian Securities Exchange along with several CSE-listed companies were also in attendance on the bus, and as these companies were not natural resource-focused (vertical farming, biotech, etc), it gave this year’s tour a more diverse flavor than in years past and everyone – from institutional and individual investors to the companies themselves – had a unique opportunity to view the small cap discovery sector in a different light.
That said, this note is really intended to focus on what European investors think of the resource sector now that we are three years into what feels like a seemingly relentless malaise.
By Chris Berry (@cberry1)
For a PDF version of this note, please click here.
This note will be shorter than usual as my travel schedule seems to have gotten the best of me. I recently returned from Costa Rica and am off to Europe tomorrow with Zimtu Capital to join them in Frankfurt (Nov 6th), Munich (Nov 8th), Zurich (Nov 10th), and Geneva (Nov 12th) as a keynote speaker on their annual bus tour. If you’d like to attend any of the presentations (numerous TSXV and CSX companies will be presenting as well) please let me know and I can get your name on the invite list.
The recent swoon in the metals markets likely has all of us questioning our faith and resolve. Personally, I see no reason why gold and silver, in particular, can’t go much lower and stay there indefinitely. Ultimately, supply and demand always equilibrate, but it can be painful waiting for this to happen. The perception of increasing economic strength in the US with a recent 3.5% GDP growth print plus continued US Dollar strength are outweighing the continued reports of gold and silver consumption in the Emerging World.
Despite numerous statements by market commentators (myself included) on the looming “nuclear renaissance”, the uranium market remains stuck in neutral:
- The real catalyst for higher uranium prices is the restart of a portion of the Japanese reactor fleet.
- Recent elections in Tokyo hint that the political ruling class is in favor of nuclear reactor restarts – but when?
- Cameco (CCJ:NYSE, CCO:TSX) held their quarterly and year end results conference call on Monday and announced a scrapping of their plan to produce 36M lbs of U3O8 by 2018.
- This is not positive news for the uranium sector in the intermediate-term and has us sticking to the belief that focusing on near-term in-situ production stories in reliable political jurisdictions is the most sensible “investment” over the long-term with high grade hard rock discoveries in the Athabasca Basin serving as a good “trade.”
Grinding The Gears
I want to start today’s Note out with a clear statement of whom or what the culprit is for uranium’s relative underperformance. This is the lack of Japanese reactor restarts (but by no means the only culprit). Many market commentators (me included) had anticipated at least some of the reactors coming back on line at this point. This was one of the mistakes I made in 2013.While it’s also clear that the ENTIRE Japanese fleet will never come back online, anywhere from 20 to 30 reactors are anticipated to restart in the coming years. The thinking here is that once some of the Japanese reactors come back on line, this will breathe life into the uranium price and, coupled with the emerging market embrace of nuclear power, push spot and term uranium prices higher, enticing more exploration and production.
