On 22nd June, with Bema priced at $1.30, I predicted a powerful advance for the stock and strongly recommended it in an article that appeared on various websites. It has since put in a sparkling performance, actually doubling from the low point early in June, leaving many investors in the stock wondering if the time has come to take profits. The purpose of this update is answer that question.
The good news is that the price has cleared the resistance in the area of last years’ high at around $1.90 and then forged ahead to clear the “round number” resistance at $2.00. There is some resistance at around $2.60 from highs back in 1998 but this should not prove to be a significant obstacle. For practical purposes we are now in “open country” and that means, in the right market conditions, that a vertical ascent is possible. At this point it’s worth noting that although the stock has risen fairly steeply over the past ten weeks, the advance has been steady and orderly, so that it is not grossly over-extended and close to burnout.
Keeping the aforesaid in mind, the outlook for gold itself clearly has a huge bearing on the immediate prospects for Bema stock. So we now take a brief look at the three-year chart for gold, shown above, where we can see that we are on the verge of a major breakout that should take gold to the mid-high $400’s (I have written a separate analysis of gold). Should this come to pass I believe that Bema, having now no significant overhead resistance, will simply “go vertical” – you don’t need to be a rocket scientist to figure this out, although I’m sure that a rocket scientist would be highly approving of the trajectory. In these conditions I would expect the stock to advance swiftly to about $4, maybe higher. This upside potential is clearly visible on the long-term chart shown below, on which we can see the clear breakout from the very bullish “pan and Handle” formation.
To guard against the possibility of a significant reaction, which is likely should gold break down from its triangular pattern, close stops should be set below $2.00. This was a resistance level and if support here fails, the reaction would likely be big enough to justify a hasty exit. But if gold does now break out upside, it should fly.
Clive Maund, Diploma Technical Analysis Kaufbeuren, Germany, 29th August 2003
As the summer of 2003 winds down, the markets are going through a classic cyclical drill. Around the world, financial assets are being priced for recovery, renewed inflationary pressures, and central bank tightening. It’s a scenario we’ve all been through before, time and again. Yet it’s the ultimate comeuppance for those of us who have been tempting fate and maintaining that “this time is different.”
It’s times like this that test any macro practitioner. Resolve and discipline are one thing. But in this mark-to-market world of momentum investing, you can’t afford to be wrong for long. While I am acutely sensitive to this feedback, I see little in the tealeaves that convinces me to abandon the basic framework that has guided my thinking over most of the past four years. As I continue to see it, the macro conundrum remains very much a tug-of-war between policy reflation and an extraordinary confluence of global imbalances. In the end, it boils down to whether the authorities have the wherewithal to spark a cyclical revival that offsets these excesses. There’s always the issue of timing — that fundamental imbalances are more of a distant concern that do not translate into a near-term macro call. While I have to concede that’s always possible, I fear that the excesses have now gone to such extremes that vigorous growth in the global economy cannot be sustained. My bet is that today’s imbalances are different. Believe me, I know full well that financial markets are now telling me that I’m dead wrong.
In all my years in this business, I’ve never come across such a worrisome and potentially lethal confluence of imbalances. For starters, they are global in scope. A lopsided world economy has never been so dependent on one growth engine — the United States. Over the seven-year 1995 to 2002 interval, revised figures now indicate that the US accounted for fully 96% of the cumulative increase in world GDP (at market exchange rates); that’s nearly three times America’s 33% share in the global economy. (Note: Previously, our estimates suggested that the US had accounted for 64% of the increase in world GDP over the 1994 to 2001 interval; revised statistics now place the total increase in world GDP over the 1995 to 2002 interval at $3.164 trillion and the US gain at $3.045 trillion over the same period.) In other words, outside of the United States, the rest of the world accounted for only 4% of the cumulative increase in global GDP over the seven years ending in 2002. While the strength of the dollar has exaggerated America’s contribution to world GDP growth over this period, there can be no mistaking the extraordinarily narrow base of this US-centric global growth dynamic.
This poses what could well be the crucial question for the macro outlook: Can the global economy continue to derive the bulk of its sustenance from the US? The answer leads to two key issues — America’s own imbalances and the potential for the world to uncover a new engine of growth. Insofar as the US is concerned, I remain convinced that it still pays to look at America through the lens of a post-bubble economy. Most disagree, arguing that three-and-a-half years of post-bubble purgatory has been long enough. But time is not the point. Since early 2000, the US has gone through a mild recession and the most anemic recovery on record. Over that same period, America’s net national saving rate has plunged to a record low, the household sector debt ratio has risen to an all-time high, and the US current account has gone deeper into deficit than ever. All this smacks of a US economy that is living far beyond its means, as those means are delineated by domestic income generation. Far from purging the excesses of the late 1990s, the United States has upped the ante on structural imbalances as never before. In my view, these imbalances are the real cost of America’s so-called macro resilience. They also highlight a persistence of post-bubble headwinds that draws America’s future role as an engine of global growth into serious question.
Which takes us to growth possibilities elsewhere in the world. Neither Japan nor Europe can be expected to fill any void left by the US. The reason — both regions have lagged in implementing structural reforms and, as a consequence, are lacking autonomous support to domestic demand. Yes, the Japanese economy is currently going through another bout of moderate cyclical improvement — the fifth such episode of its own post-bubble era. But like the ones that preceded it, this upturn also rests on the shaky foundation of a largely dysfunctional financial system. Until Japan finally bites the bullet on more aggressive banking reforms, nonperforming loans of “zombie-like” companies will endure and restructuring of the nonfinancial economy will undoubtedly lag. The result will be a lingering sense of job and income insecurity that should continue to crimp sustainable growth in domestic demand. The same can be said for Europe, where high and rising structural unemployment continues to inhibit the emergence of a solid base of support for domestic demand.
Europe and Japan also share another element of the macro conundrum: Lacking in domestic demand, they have both become overly reliant on external demand as a major source of economic growth. As such, they are keenly sensitive to shifts in the relative price of their currencies as major swing factors in their growth prospects. Currency manipulation has long been a central feature of the Japanese growth model, and record intervention against the recent strengthening of the yen — some US$75 billion in the first eight months of 2003 — leaves little doubt that this approach is alive and well. Nor is there any qualm about the role of the euro in shaping the Euroland growth dynamic. German Chancellor Gerhard Schroeder has already suggested that the ECB needs to be wary of the perils of a strengthening euro, and our own Euro-zone team continues to view currency swings as a major driver of shifts in their regional growth prognosis.
Elsewhere in this US-centric world, external demand — and its currency underpinnings — remains critically important. Nowhere is this more evident than in China, where export growth accounted for more than 75% of overall economic growth in 2002. Yet with the restructuring of its state-owned enterprises taking an unrelenting toll on employment and domestic income generation, and with China lacking in the safety net of a social security and pension system, the Chinese growth miracle has little in the way of autonomous support from domestic private consumption. Against this backdrop, it should be hardly surprising that external demand remains a key driver of economic growth in China — mirroring a critical characteristic of most other developing nations in Asia, Latin America, and Eastern and Central Europe. In a US-centric world, export support is the rule not the exception. The more economies suffer from a deficiency of domestic demand, the more dependent they become on external support from world trade and on the currency underpinnings of such a growth dynamic. Make no mistake — this is a global phenomenon. Over the 1995 to 2002 period, worldwide growth of exports (goods and services) accounted for fully 50% of the cumulative increase in global GDP.
All this underscores yet another precarious aspect of today’s US-centric global growth paradigm: Externally-led growth in a precarious global economy is a recipe for the politicization of cross-border tensions that could further undermine the macro climate. Such tensions are very much evident in today’s climate as the world repeatedly singles out China as a scapegoat for its own problems (see my 14 July dispatch, The Scapegoatting of China, and my 29 August dispatch, The Politics of Globalization). As political cycles collide with jobless business cycles, politicians facing elections usually can’t resist playing the blame game. Currency risks then take on new meaning, as does the stability of the external demand support of a trade-dependent world.
Imbalances and macro tension speak of an inherent disequilibrium in the global economy. Yet financial markets are making the time-honored bet that policy stimulus tempers such instability and returns the world to a more sustainable and vigorous growth path. The explicit presumption of “policy traction” is very much open to debate, in my view. In the case of the US, for example, the three sectors most amenable to policy stimulus — consumer durables, homebuilding, and business capital spending — are the same three sectors that either went to excess in the bubble (capex) or in the post-bubble period (cars and housing); as such, any upside response could well be muted. Elsewhere in the world, the lack of structural reform can be expected to offset the impacts of conventional fiscal and monetary stimulus.
But this begs an even more crucial question: Can policy traction “paper over” the imbalances of a US-centric world? This is where the rubber meets the road as far as I am concerned. Reflationary policy initiatives are no substitute for global rebalancing. In the case of the United States, another burst of deficit-financed domestic demand will only exacerbate the excesses of debt, saving, and the current account. In the cases of Japan and Europe, competitive currency devaluation will only inhibit the very reforms that are needed to unshackle domestic demand. And, at the same time, politically-inspired China bashing can only threaten the global trade dynamic that now plays such an important role in driving world economic growth. That underscores the ultimate irony of the so-called reflation play — that any policy-inspired rebound may well exacerbate the imbalances of the US-centric world. Financial markets that bet on the quick and easy fix do so at considerable peril, in my view.
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