Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Market Musings 28/4/11

with 2 comments

A case of “as you were” in the markets since my last update. Commodities remain at dizzying heights, sovereign concerns continue to loom large and equity markets continue to defy gravity.

Eurostat released its debt and deficit updates for 2010 on Tuesday, which reaffirmed what we already knew about the woeful state of the balance sheets and profit & loss accounts of many EU’s countries. Greece’s deficit hit 10.5% of GDP, above the 9.6% forecast. It was exceeded only by ourselves – at 32.4% – while other states in the deficit dog house include the UK (10.4%), Spain (9.2%) and Portugal (9.1%). I cannot understand why so many British commentators criticise the austerity measures being implemented by Chancellor Osborne – were it not for these steps the UK’s 10 year bond yield, currently at 3.48%, would be a lot closer to Greece’s 15.39%.

Ireland’s debt/GDP ratio ballooned from 65.6% in 2009 to 96.2% at the end of last year. Only Greece (142.8%), Italy (119.0%) and Belgium (96.8%) have a higher ratio than ourselves. Given the state of the Exchequer Returns posted since the start of the year, I assume that we’ve eclipsed Belgium by now. The words of Thomas Jefferson come to mind: “To preserve our independence, we must not let our rulers load us with perpetual debt”.

The bond markets continue to suggest that debt restructuring is inevitable in the PIG countries. The 2 year bond yields for Greece, Portugal and Ireland as I type stand at 23.4%, 11.4% and 11.1% respectively. Those of you who don’t obsess about markets as much as I do (!) may wonder why I’ve narrowed it down from the “PIIGS” acronym that used to do the rounds. Simple fact is that the market seemingly isn’t as bothered about Italy (2 year yield is only 3.0%) and Spain (2 year: 3.3%). You’d have to be a brave person to say the market has it wrong, but I am extremely nervous about Spain, and wouldn’t be surprised to see it moving back into the bears’ cross-hairs later in the year.

Turning to the US, here is some interesting housing stuff for you – More than 1 in every 5 Phoenix-area mortgage holders would need their homes to double in value just to break even. Elsewhere, there were few surprises from the Federal Reserve after its meeting this week. I do note, however, that the Fed has downgraded its growth expectations for the US, despite its massive stimulus efforts. By The Ben Bernank’s own admission: “It is a relatively slow recovery“. For a good primer on the folly that is quantitative easing, watch this video. Congressman Paul, one of my favourite politicians, talks a lot of sense about the Fed here.

Economics geeks will treasure this video.

Jeremy Grantham, who is the G in GMO, has written an outstanding investor letter which you can download here. While I wouldn’t agree with 100% of it, it is peppered with thought-provoking analysis and interesting stats. One thing that particularly caught my eye was the table that revealed China’s share of world commodity consumption:

  • Cement 53.2%
  • Iron Ore 47.7%
  • Coal 46.9%
  • Pigs 46.4%
  • Steel 45.4%
  • Lead 44.6%
  • Zinc 41.3%
  • Aluminum 40.6%
  • Copper 38.9%
  • Eggs 37.2%
  • Nickel 36.3%
  • Rice 28.1%
  • Soybeans 24.6%
  • Wheat 16.6%
  • Chickens 15.6%
  • PPP GDP 13.6%
  • Oil 10.3%
  • Cattle 9.5%
  • GDP 9.4%
When the Chinese economy rolls over, as I expect it will in the not-too-distant-future (see previous blog entries about China’s property bubble and other pressures), that table will be particularly useful when it comes to predicting what commodities and shares will be the most affected.
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2 Responses

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  1. […] what exposures they have, while if you have a more commodity driven company, might I direct you to the table in this earlier blog I wrote which shows the % of global consumption of each major commodity that China is responsible […]

  2. […] (!) but I think his concerns are warranted, not least given my previous blog post about the proportion of global commodity consumption that China accounts for. Another pointer of note about China, which should give a lot of investors the heebie-jeebies, is […]


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