Eureka Correspondence

Understanding the global economy, oil price drop and investing in the US.

Understanding the global economy

I'm somewhat confused with Adam Carr's reports.

On October 28 in Business Spectator Adam advised: "The case is urgent, western nations must restore the economic order, a failure to do so will be catastrophic."

Yet on November 24 Adam advised: "Nothing appears to justify an end to the Australian rally that’s been in place since 2012.  A lot of the negativity is already priced in, China has further to run and we are likely to see clarity soon about further capital requirements for our banks. We are simply in a hiatus – not a prolonged period of stagnation – that will resolve over time."

Similarly, on October 28: "No, it wouldn’t take much for what residual trust there is in the US dollar to evaporate -- for the current monetary system to collapse. Competitive devaluations, trade restrictions, a spike in the gold price, perhaps even a US debt default would follow. The world economy would be thrown into chaos and we are closer to this now than we have been in decades. The case is urgent, western nations must restore the economic order, a failure to do so will be catastrophic.”

Then on December 1: "Investors don’t need to be concerned about the durability of the US expansion. Indeed, the US is firing on all cylinders, with broad-based economic growth, the number of jobs strengthening, household incomes rising at a rapid rate and people saving more ... Instead we have broad-based economic growth, with the US firing on all cylinders. Jobs growth is strong, household incomes are rising at a rapid rate and savings are high."

Am I misreading these reports?

Some clarification would be appreciated.

Anne Waters

Adam Carr’s response: Thank you for your letters. No you haven't misread the reports - and nor are they inconsistent. Indeed at the latest Eureka investment conference I outlined both of those views - and the reasoning behind them - to attendees. One article highlights the base case scenario. That is, the data that we have now and that the leading indicators suggest will continue into the future. The US economy is surging.  

The other article discusses what I see as the greatest risk confronting the market and the global economy at this point. It is not the base case scenario however -  only a risk to that base case scenario. I made the point at the conference that most of the risks that get discussed in the market at the moment - eg deflation, secular stagnation etc -  are either implausible or extremely low probability events. In contrast, emerging market nations losing faith in the USD as a store of value is very real  - and the risks have risen appreciably. The case for a change in policy direction is urgent given that the ensuing crisis would be catastrophic. Having said that, a USD crisis is still not my base case scenario. Why? Because I don't think US policy makers are that stupid in the end. However, to protect against the rising risks outlined in that article, I think investors should introduce physical gold into their portfolio. 

Oil price drop

With the dramatic fall in the oil price I am wondering what the eventual effect may be on the supply side.

There is plenty of talk that the large iron ore producers are increasing volumes in order to force the smaller guys out as well as the higher cost Chinese producers. With the apparent increases in oil on the supply side (US fracking) are we likely to see this consequence occur in the oil space? And if so, is it likely to take some time?

As the supply effect in the US is due to fracking technology, is there an oil price where this form (or any form) of extraction is uneconomical thus resulting in supply side drop off?

Andrew Delbridge

Editor’s response: Thanks for your letter. Tim Treadgold has today published an article addressing the fall in the oil price and its effect on producers – Oil plunge: What to do.

Investing in the US

Have I missed an article on how to invest in a basket of US shares?

I want liquidity, exposure to the market but not by buying individual stocks ... and not all the paperwork that is involved in investing in some funds.


Editor’s response: Thanks for your letter. You might be interested in today’s article, How to choose a fund manager for international equities. This article focuses on actively managed funds but also mentions exchange-traded funds. Otherwise, you might be interested in Buying overseas stocks: A Eureka guide.

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