In the simplest sense we carry out speculation on day to day basis. But our speculation is based on a investment thesis which is ultimately confirmed by data. We are becoming increasingly alarmed in the economic situation in China give the recent development. These include
- Further deterioration of Chinese disclosure on economic statistics. The level of disclosure out of China has never been high. The recent crackdown on the China’s National Bureau of Statistics further increase the fog of war in trying to understand what is going on in the Chinese economy. Our hypothesis is that there is never one cockraoch. We are by nature skeptics. You never seen a crackdown if everything is fine.
- The traditional approach of managing political dissent is transitioning into economic and financial reporting. This is not a positive development.
- Outrages level of trading of Steel and other commodities futures. This has artificially pushed up iron ore prices. We agree with the notion that the power of price setting has increasingly shifted to the East. We would argue the prices of commodity should be driven by underlying economic fundamentals. The increase level of speculation detached from fundamentals increase risk of market overshoot. Higher prices than what is warranted by supply and demand means that uneconomic supply will be brought back onto the market. This would exacerbate the eventual settlement supply and demand.
The issues in Chinese economic data and the low Australia Inflation numbers means we are cutting our bullish view on the Aussie dollar forecast. On the equities side, we are more cautious of miners especially the out look for BHP dividend. We have hedged our AUD exposure and will stay neutral until the price correction in Iron Ore, Coal and Copper reaches capitulation levels.