Maybe this is the bottom for iron ore, the great red hope for Australia and the government.
Maybe a resurgent price will deliver a windfall for the government, boosting the budget and helping them to avoid the need for tax reform.
The simple fact is that the iron ore price jump relates to China’s massive surge in new credit over the month of January. China created a record amount of new debt last month. The figure was an astounding $525 billion.
This is not the first time the iron ore price has received a boost from China’s attempts to stimulate its economy. During the iron ore bear market that began back in 2011, the iron ore price had big rallies in 2012, 2013, and a lesser one in 2015.
This is just another episode. The bottom line is that the market is in structural oversupply. The only way to improve the structure is via a falling price.
So this bounce will be short-lived, like the others. That’s especially the case because China isn’t managing its banking system very well. Soon after the news of January’s record credit creation, rumours surfaced that China would reign in some of the banks.
One minute they’re lending too little. The next they’re lending too much. In a major worry for the ongoing build-up of risk in China’s financial system, apparently 75% of January’s credit creation went to corporate borrowers, an already heavily indebted sector.
Given the ‘not too bad’ reporting season so far, there’s no urgency coming from any quarter. The fact that the share market is more than 20% off its highs, and still nowhere in sight of its 2007 peak, has more to do with an ‘irrational’ market than the stark reality of the situation.
But don’t forget, the earnings numbers coming through now are up until 31 December. The market has already factored these results in. It’s looking ahead now, into the second half of the year.
The fact that the main market index, the ASX 200, remains in a strong downtrend tells you the stock market doesn’t see an economic resurgence coming anytime soon. That could change of course, but if you have respect for your money, take note of what the market has to say over any self-serving ‘opinion’.
Extract of the article published by Greg Canavan,
For The Daily Reckoning 22 February 2016