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Nordic Association of Electricity Traders
15th anniversary of NAET in Paris
David Fuller 14th April 2011
Bubbles, Supercycles and the Next
Three Big Energy Stories
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The Art of Bubbleology
What are the two
really big bubbles today?
Can you identify them?
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September
1981
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US 10-yr T-Bond Yield
28-year bull market over
Secular bear market beginning
Yield should at least
over next ten years
Does it make sense to buy
at these yields?
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30-year T-Bond futures (My Baby Steps tactic)
Expecting a ranging downward
bias, I short lightly on rallies
and cover incrementally
on declines
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G-7 sells JPY
JPY/USD
Yen bubble burst by
multilateral intervention
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USD/JPY – From ¥360 to ¥76.25
on 17/03/11 – G-7 intervenes on
the following day
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Happiness in forex is having the
central bank(s) and the trend on
your side.
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Previous multilateral interventions
1. Plaza Accord September 1984 (weaken USD)
2. Louvre Accord February 1987 (support USD)
3. April 1994 – August 1995 (support USD)
4. September 2000 (support EUR)
5. March 2011 (weaken JPY)
Previous multilateral interventions have always
been successful, if not immediately,
over the medium term.
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Using Baby Steps, I
buy on easing and
lighten on rallies,
looking for ¥90 to ¥100
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Same tactic applicable
for EUR or any other
currency against the yen
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Supercycles
Do you see any?
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Continuous Commodity Index (Old CRB)
An equal-weighted geometric average of
commodity price levels relative to the
base year average price
Supercycle
1971 to 1980
Supercycle
2001 to 20??
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Continuous Commodity Index (Old CRB)
Semi-log scale
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Which global economic trend
do you think we will we see:
1.Depression?
2. Muddle through?
3. Supercycle?
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Supercycle: “A period of historically high
global growth, lasting a generation or more,
driven by increasing trade, high rates of
investment, urbanisation and technological
innovation, characterised by the emergence
of large, new economies, first seen in high
catch-up growth rates across the emerging
world.
“Growth will be strong but not smooth – the
business cycle exists.”
Gerard Lyons, Chief Economist and Group Head of
Global Research at Standard Chartered Bank
15 November 2010
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“The first supercycle took place during the
second half of the 19th century, from 1870 until
1913, the eve of the First World War. At the
time, the world economy witnessed a
significant step-up in its rate of growth, rising
2.7% on average per annum in volume, or real
terms. That was a full 1% higher than the
average growth rate seen during the previous
half-century. America was the big gainer,
moving from the fourth largest to the largest
economy.”
Gerard Lyons, Standard Chartered Bank
15 November 2010
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“The second supercycle was after the
Second World War until the early 1970s.
World growth averaged a huge 5% per
annum, again real or inflation-adjusted
terms. Japan and the Asian tigers saw the
biggest gains over the time.”
Gerard Lyons, Standard Chartered Bank
15 November 2010
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Supercycle enablers:
1. (1870-1913) technologies emerging
from the Industrial Revolution
2. (1945-1971) post WW2 reconstruction
and emerging middle class in the west
3. (2003-20??) near universal adoption of
capitalism, globalisation, accelerated
technological innovation, emerging
middle classes from Asia to South
America and Western Europe
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The next three big energy stories –
what are they?
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1. Shale gas
2. Shale oil
3. Nuclear renaissance
(subject to governance)
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Source: US Energy Information Association (EIA) April 2011
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Regions currently known to have shale-gas reserves
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“Study reports non-US global shale gas
recoverable resources of 5,760 Tef; global
shale gas boosts total recoverable natural
gas resources by 40%.”
EIA (US Energy Information Association)
6 April 2011
Note: This 40% estimate above is based on a very
conservative recovery of only 20% to 30% of
currently known reserves.
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The nuclear renaissance
was finally underway,
until…
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Nuclear Godzilla Unleashed
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The biggest nuclear risk Most the reactors used today
were built in the 1970s – 1980s.
No wonder they leak!
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Fuel for the Pebble Bed Reactor – meltdown free?
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Pebble Bed Nuclear Reactor
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Pebble Reactor Nuclear Fuel
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Where does their electricity come from?
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Uranium (MBURNXRE)
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Shall we look at
some stock markets?
The best ones will have
already surpassed or at
least equalled their
2007-2008 highs.
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Stock markets are currently
caught within a tug of war.
Commodities vs Liquidity
Consequently ranging is occurring,
albeit within a cyclical bull market.
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Denmark
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Finland
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Fortum
yield 4.25%
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Norway
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Sweden
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S&P 500 Index since 1953
David,
SPX historic, semi-log here
Secular
valuation
contraction
Secular valuation
contraction
Box and label the valuation contraction cycles
2000 to 2015?
1967 to 1982
Updated through
30 Sept 2010
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S&P 500
important because
of leash effect
Susceptible to further
mean reversion
towards rising MA
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S&P 500 ÷ Gold Bullion
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NDX 100 above 2007 high, outperforming S&P 500
but still susceptible to MA mean reversion
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German DAX
susceptible to further
ranging mean reversion
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Fullermoney secular equity themes:
Asian-led emerging (progressing) markets
Central and South American-led resources markets
Precious metals
Industrial resources
Supply inelasticity themes such as energy and water
Global infrastructure development
Information technology
Western multinational leaders leveraged to global growth
Dividend ‘aristocrats’
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How many of you are bearish of China?
List reasons:
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Property bubble
Ghost cities
Desertification
Aging population
Inflation
Authoritarian government
Corruption
Command Economy
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Ancient civilization
Huge population
Work ethic
Self-belief
Education
Command capitalism
Huge foreign reserves
Visionary planning
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China Shanghai A-Shares
Massive issuance of
government held,
previously unlisted
shares to raise bank
reserve ratios from
Aug 2009 to Nov 2010
Now has medium-term
upside breakout potential
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Hang Seng China Enterprise H-Shares
(Medium-term breakout potential)
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Hong Kong Hang Seng Index
(Medium-term breakout potential)
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India
(a long-term Fullermoney favourite)
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India Sensex Index
(rocked by corruption and
inflation but one of the
best for the long term)
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Indonesia – An ASEAN leader
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Fiat Currencies
The least bad in this environment:
Those of Asia-led growth economies, resources
exporters, financial currencies (CHF & SGD)
Higher risk:
Debtor currencies – USD, albeit somewhat
oversold, GBP & EUR (unless it becomes DEM-lite)
In the distant future:
Chinese Renminbi will be the next global reserve
currency but probably not before 2050
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Asian Dollar Index
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Latin American Dollar Index
(not good in a recession)
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Commodities
Secular bull market, but volatile:
‘Supply inelasticity meets rising demand’
Gold has been remonetised in the eyes of
investors
Commodity price inflation – an opportunity
and also the next big risk
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Continuous Commodity Index (Old CRB)
(currently overextended relative to MA)
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Gold bullion (monthly)
Sep ‘09
Secular bull markets
usually end with a dramatic
upward acceleration
Sep ‘07
Sep ‘05
Note the 2-year
cycles
Sep ‘03
Sep ‘01
Updated through
1 October 2010
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Gold
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Gold, (CPI Inflation-Adjusted)
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Silver
(currently overextended
relative to MA)
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Silver (CPI Inflation-Adjusted)
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Crude Oil (Brent
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Crude Oil (Brent)
(overextended relative to MA)
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Medium to longer-term risks
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Industrial commodity price inflation
Food price inflation
Progressing economy inflation (current)
Regressing economy stagflation
Higher interest rates
Trade protectionism
Commodity ‘wars’
High frequency trading (another WMD)
Climate change
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Current bull points
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Monetary policy is still accommodative
Interest rates are low
CPI inflation is low
Progressing economies are healthy
The West’s recovery is only 24 months old
Household savings are rising
Equity valuations are reasonable
Corporate balance sheets are mostly strong*
* (Where leveraged to the global economy)
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Fullermoney summary forecasts
• The Asian, resources and tech-led global
stock market recovery will resume 2H 2011
• This cyclical bull market should have at least
another year to run, provided energy and food
prices do not spike too high, prompting
central banks to tighten more aggressively
• The 28-year bull market in US government
bonds is over – yields are base building and
will range higher over the medium to long
term
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Fullermoney summary forecasts
• Gold’s secular bull market has at least several more
years before it is halted by higher rates
• The secular bull for industrial commodities will
continue, punctuated by recessions
• Progressing Asian and resources economy stock
markets will continue to lead
• US and European multinationals leveraged to the
global economy will outperform
• Leading or promising sectors include: technology,
Asian healthcare, mining, agriculture, global
infrastructure, and dividend increasers
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Climate Change
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Thank you very much
Fullermoney is a
Global Strategy Service
produced by
David Fuller
&
Eoin Treacy
We invite you to visit our site
www.fullermoney.com