This from The Sovereign Society:

Over the next six to eight months, our core trading strategy is based on three key ideas:

1. Global demand will continue to deteriorate
2. China will surprise on the downside
3. Commodities prices will sink back to their 2001 levels

Based on these three views, my trading partner Jack Crooks and I are bearish on currencies that depend on commodities to support their growth. And within the pack of commodity players we are most bearish on the Australian dollar.

Right now, Australia is effectively a satellite country of China. In my opinion, the market is not even close to pricing in the plunging growth in either country just yet. But when the market does, I believe the Australian dollar will get pounded lower.

Now might be a great time to consider put options on the Aussie. Here’s a more detailed look at why…

The economy is in trouble and sinking fast. From the Financial Times “The deterioration of the country’s terms of trade is crunching national income.

Recession now seems a formality: Growth last quarter, at 10 basis points, was the weakest in eight years. Households and farms are over-borrowed, and companies are even worse. Their financing requirement blew out to an all-time high last year of almost 8% of output.

With debt hard to come by, companies have three choices: Stop spending, raise equity or go broke,” according the Financial Times.

And the fact that Australia’s current account deficit is already the highest among the major currencies, estimated at 4.8% of 2008 gross domestic product (GDP), makes the currency vulnerable. (Note: the U.S. current account is estimated at 4.5% of GDP, but players have to hold U.S. dollars in order to transact trade and capital flow. They do NOT have to hold Australian dollars.)

China’s “Hard Landing” Will Clobber Australia: Not too long ago, China was everybody’s darling economy. But the crowd of China cheerleaders may be in for a very big surprise – a hard economic landing! Already Australia is suffering from the Chinese slowdown, but the probability that it will get much worse is rising fast as China’s growth numbers continue to fade.

“The one-time engine of global economic growth has been sputtering as a result of dented global demand for exports and over-zealous tightening policy at home. A hard landing, like recession, adds new fear to the mix. With shares and real estate worth sharply less, unemployment rising and deflation round the corner, companies and households are already reluctant spenders; household savings deposits rose by more than 20% in the year to November,” is how the Financial Times recently summed up the rising problems facing China.

As China goes, so goes the demand for commodities and the source of Australia’s growth. China’s troubles are the key reason I believe commodity prices have further to fall. And looking at a long-term chart of the Commodities Index, I think it will revisit 2001 territory – the year commodities prices blasted off.
Commodities Index vs. Australian $ Weekly-Round Trip to 2001!

AUDUSD Cliff Diving Chart

Aussie yield support could fade fast. Australia has been a great place to park money during the past seven years. The country was growing along with commodities, and the Reserve Bank of Australia kept their rates high to rein in inflation during this boom period.

The Aussie dollar has been the highest yielding of all the major currencies for many years, and still is. But the rapid deterioration in Aussie growth and the fact that governments are fighting deflation, not inflation, leads me to believe Australia’s central bank will hack much more off its official policy rate, which now stands at 4.25%.

I am not sure how far the RBA will cut rates, but I do believe the bank will aggressively cut rates. When they’re done cutting rates, the high yield differential that created such a seeming “no-brainer” demand for Aussie dollars will be gone.

When that happens, the Australian dollar should accelerate to the downside.

Bottom line: Australia’s growth should soon go into negative territory. The country’s already ugly current account deficit should grow worse. Australia’s key customer – China – will likely be buying a lot fewer commodities. At the same time, the Reserve Bank of Australia will likely cut interest rates much faster than now expected in an effort to generate growth.

All of this is bad news for the Aussie over the next several months.

Source: That Sinking Feeling Down Under

An article in the English-language of the German der Spiegel newspaper reported that the billion-dollar Sovereign Wealth Funds (SWFs) have lost up to 25% of their value – depriving the markets of a major cash source.

For those of you unfamiliar with SWFs, they are state-owned investment houses whose charter is to protect any budget surplus with prudent investments. The commodity boom of the past few years has filled the coffers of SWFs rich in raw materials such as oil, natural gas and metals.

Thought to be impervious to market swings, SWFs were held up as secretive groups with an uncanny knack for finding the best investments. That reputation blew up, however, when SWFs started to prop up Merrill Lynch, Citigroup and other big investment banks that ultimately lost a bundle.

These once-infallible mega-investors are now liquidating as they try to save their butts. In the process, money that they would have allocated to major investment projects such as commercial real estate, banking, oil exploration and other cash-intensive endeavors is simply going away.

The implications for both emerging and industrialized markets are profound, fueling speculation that the economic malaise could last longer than previously anticipated.

The article in der Spiegel reports that Norway’s $300 billion Government Pension Fund-Global, was down 7.7 percent in the September quarter. It was the worst performance in the 18-year history of the fund, which invests Norway’s oil revenues.

All told, SWFs have lost 18% to 25% this year alone, according to der Spiegel story. That could mean some $700 billion in cash has been taken out of the global investment pool.

The Abu Dhabi Investment Authority, perhaps the world’s biggest SWF, may have lost up to one-third of its $900 value, the German newspaper said. Things were bad in other Mid-East SWFs as well.

The Kuwait Investment Authority lost about 30% of its $250 billion reserve, although $50 billion of those losses may have been recouped with a new infusion of oil money. The Qatar Investment Authority is thought to be down 20% in 2008.

As the recession continues, where will new money come from? Well, it seems that taxpayers are picking up where the oil sheiks left off with bailout campaigns going on all over the world.

This from Sovereign Society:

The “Elastic Rubber Band” theory is a popular investment term to describe wide price swings in asset markets. Market moves are usually exaggerated on both sides of the trade and this year’s volatility in oil prices is a testament to that swing.

In a bull market, trends tend to rise far above anyone’s boldest predictions while the same is true when a major reversal lends to big price declines. Could anyone have possibly predicted crude oil would be trading at $35 six or even twelve months ago?

Now oil producing countries are looking to arrest a crash in oil prices – down a formidable 76% since peaking in July at US$147 a barrel. Oil now trades at a 4-year low and is down a dizzy 62% in 2008 – its first calendar year decline since 2001. In late 1998, amid the Asian economic crisis and the Russian debt default, oil prices bottomed at US$10.50 a barrel (see above chart).

Is it possible we’ll see US$10 oil again? I don’t think it will happen, barring another Great Depression.

Global governments are in the midst of the greatest expansion of credit in modern history. As liquidity eventually finds its way back into credit markets and lending commences once again, commodities, including oil, should find a bottom. That’s what happened in 1998 as the Asian economic crisis ended; ten years later, oil is still trading 233% higher though down a mind-boggling 76% from its all-time high in July.

O.P.E.C. (Organization of Petroleum Exporting Countries) announced production cuts of 2.2 million barrels per day this week to stem the rapid decline in crude. With the global economy now either in recession or heading into a serious period of economic contraction in 2009, demand for oil and other distillate products has declined sharply since September. China, the largest importer of most raw materials and the world’s third largest importer of oil, saw exports decline in November for the first time in years.

It would seem logical to assume that oil prices have clearly overshot to the downside at this point. I would imagine most of the decline in global demand has already been priced into oil at $35 a barrel. The fact is, global long-term supplies are not being replaced by annual production, with most oil fields now in decline.

Only several months ago, the world stood at a net deficit of about 2 million barrels per day or, roughly, 86 million barrels of demand per day against supplies of 84 million barrels. Now that gap has not only narrowed but, in the span of just three short months, has turned into a gusher as supplies overwhelm producers.

It’s unlikely that a new bull market is taking hold in oil any time soon. We’ve just had a bust. Yet it would be a mistake to dump oil and the energy stocks at this point after huge declines since July. If anything, this is the time to buy oil ahead of aggressive U.S., European, Chinese and Japanese economic stimulus in 2009. If history is any guide – the Asian experience ten years ago, a depression by all accounts, eventually saw oil bottom at a ridiculously low level – it’s hard to believe we’ll see $10 oil again.

Source: Elastic Band Theory Stretches Oil Price Crash

This from Today’s Financial News:

Regardless of this man’s selfishness, I eventually pulled up to the pump and put five gallons of gas at $1.93 each into my tank. A ten-dollar fill-up was more than enough to put a smile back on my face.

It would have taken twice that to fill my tank, but I took a bet that prices would be even lower by the time I needed to refuel. I saved five gallons of tank space for gas at $1.85 in just a couple of days.

So far, my prediction is paying of. After nose-diving from the $60 handle, crude prices dipped below $50 this morning. It is the first time in nearly 24 months that we have seen prices that low.

With crude prices dropping, it is no wonder other components of the energy sector are plunging as well. Most importantly, the price of a gallon of gasoline on the wholesale market dropped by more than 6% this morning to trade at $1.034.

Natural gas dropped almost a dime to a level where $6.644 will get you 1,000 cubic feet. And for all you folks waking up to sub-freezing temperatures and snow flurries in the Northeast this morning, you will be glad to know heating oil declined by 5.33 cents to $1.706 per gallon.

In a time when America is facing a major recession and job losses are reaching monumental levels (542,000 workers applied for first-time unemployment benefits last week), falling energy prices are a greatly needed silver lining for consumers. Just imagine if we were still paying $4 per gallon of gas. It would not be pretty.

Our gain is their loss

For the folks depending on record-high oil prices to fuel their economy, the situation is downright horrid. If Venezuela is in financial trouble, then the situation in Russia is downright catastrophic.

Investors should be drooling on their shirts looking for ways to take advantage of Moscow’s troubles. In the office this morning, we were debating all the opportunities face investors. We came up with at least half a dozen great opportunities. As we gather our thoughts and complete our research, we will share what we know.

For now, take a look at the Market Vectors Russian ETF (NYSE:RSX). It invests directly in about 30 Russian securities. It gives investors an easy way to play a market that is down nearly 80% so far this year.

As energy prices continue to drop, Russia’s economy will slow even further. With about 40% of its revenues dependent on the energy industry, the government is in a desperate situation.

When it compiled its 2009 budget earlier this year, Moscow used $95 oil as its base figure. With prices about half of that figure, the country is sitting on a serious deficit. To make matters worst, the country has already lost nearly $100 billion in its emergency reserves thanks to efforts to shore up the ruble and preserve what is left of its economy.

I may have started the day on a bad note waiting to pump cheap gas in my truck, but Russia is about to start 2009 in absolutely horrendous shape.

If I could only make one investment during this entire crisis, I would take a significant short position in the Russian economy. The ETF mentioned above gives investors a fantastic opportunity to do just that.

Source: Oil and Russia: Check out the Market Vectors Russian ETF (RSX)

This from Taipan Daily’s Emerging Markets blog:

Right now, copper spot prices are an anemic $1.65 per pound. That’s an amazing drop from above $4 back in June.

And yet, one Chilean copper mine is actually expanding.

The mine is called Dona Ines de Collahuasi. It’s Chile’s third largest copper mine and is located in an historical copper mining area. Back in 1880, a large, high-grade copper and silver vein was found. It’s one of the world’s largest copper resources.

Right now, the mine produces roughly 440,000 tons of copper a year.

But the mine has just approved a $64 million project that will increase annual output by 30,000 tons. And that’s just the first expansion.

At the end of the first quarter of 2009, a $750 million expansion plan will boost production to 650,000 tons a year. After that expansion is complete, the mine intends to increase production to a full one million tons of copper a year by 2014.

That’s an astounding move.

And one that will need some major financial backers, particularly if copper prices don’t recover. It’s a good thing some big companies own this mine.

I’m talking about Anglo American (Nasdaq:AAUK) and Xstrata (LON:XTA), each with a 44% stake. There’s also a Japan’s Mitsui (Nasdaq:MITSY), owning 12%.

The CEO of the mine, Jon Evans, told the newspaper Diario Financiero, “The mid and long-term plans are the same, therefore our expansion plans are also the same.” Which may pay off in the long run… If it can survive depressed copper prices.

And copper prices have continued to fall, despite a huge cash injection by China to its economy. China is the largest user of many of the industrial metals, like iron ore, aluminum, zinc, and, of course, copper.

So with China’s economy slowing (albeit to 7.5%), the country will use less of those materials.

Now, China’s been part of the reason why copper prices had more than doubled since 2002. If Chinese demand continues to slow, that could mean a long time before we see copper prices begining to climb again.

Which would mean that Anglo American, Xstrata and Mitsui will have to wait for the returns on these major expansion.

But it would also mean that they’d be ahead of the game once things begin to turn around… If they can afford it.

Source:Copper: Chilean Investment Still Expanding

This taken from Today’s Financial News:

With its main source export revenues plunging down over 50%, the outlook for the Canadian economy and the Canadian dollar is getting bleaker by the day.

Oil prices dropped once again after the U.S. government reported a 0.3% contraction in the U.S. economy in the third quarter.

Light, sweet crude oil for December delivery fell by$1.91 to $65.59 a barrel on the NYMEX. Overall, oil prices are now down 55% since the peak of $147 a barrel in mid-July.

Thanks to lower energy and resource prices and a surging dollar, yearly consumer inflation in the United States peaked at 5.5% in July. It is now set to fall to close to zero by early 2009. Good news for people who’re holding dollars. Not so good news for our neighbors who made a mint on exporting oil to the States.

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Oil at $50 a Barrel — Gold at $500 by Christmas? With stocks as volatile as nitroglycerin, gold should be trading above $2,000 an ounce! But the dollar insurrection has shaken up the commodities markets. Some experts now put gold’s downside at $500… even $400. What if they’re right? TFN’s options strategist Andrew Snyder has developed a gold hedge strategy that could make you money on your gold position either way. Find his Special Report on the Members Only Reports section of HotStockConfidential.com. To become an instant member, click here…

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Canadians like to point at U.S. “financial turmoil” to explain the sudden drop in oil revenues and the decimation of the exchange rate.

But applying the moral standards espoused by America’s global critics during the boom years — namely, that an evil or at least reckless America was raping the world by consuming so much — we prefer to think there now should be a sense of universal satisfaction with the fact that the U.S. has stopped over-consumption.

(We just hope they prudently saved the revenues surplus for a rainy day!)

American frugality, however, will limit Canadian economic growth to 0.8 per cent this year. Despite several months of negative growth, Canada still hopes to avoid a recession, according to the Conference Board of Canada. But in real terms, Canadians may feel like they’re in recession already as inflation is predicted to come in a 3.3% annual pace.

Falling oil prices are now eroding the economic viability of the crucial Canadian production from oil sands. At the same time, dropping resource prices are threatening to plunge metal mines back into fiscal obsolescence. Once they hit certain prices, mines and wells will not sinply be scaled down but shuttered. In many cases, it’s an all or nothing proposition.

Canadians are still arguing that China will make up the shortfall. We wish them good luck.

Low Canadian growth due to flagging resource and energy exports to the United States may result in increased government spending, budget deficits, unemployment and increasing inflation in the Canadian dollar.

At this point, I believe the days of parity between the two North American currencies are gone for good. And unless Celine Dion is deported back to Quebec for lack of social empathy, it’s time to short the Canadian dollar.

Source: Time to short the Canadian dollar

Now with oil down more than 50% from near $150 a barrel in July, the Persian Gulf is beginning to suffer from its own credit squeeze.

The bottom line is that world credit markets could suffer, further crippling the economy and the banking industry.

Persian Gulf SWFs control huge amounts of money. The combined funds of the United Arab Emirates (UAE), Saudi Arabia, Kuwait, and Qatar account for more than half the $2.5 trillion total assets of global SWFs.

As of March 2007, the UAE and Saudi Arabia had, respectively, the first and third largest SWFs internationally, and Kuwait ranked sixth, according to Middle East Quarterly. Persian Gulf SWFs have become the favored investment vehicles of Kuwait, Qatar, and the United Arab Emirates. And they’ve been busy…

Last year, SWFs engaged in 173 corporate transactions representing $83 billion – twice that of 2006, according to mergers and acquisitions tracker Zepher.

But now, many Persian Gulf nations are staring at barrels of oil that could sell for $65 each versus near-$150 over the summer.

The Persian Gulf also had a rude awakening that despite its oil riches, it is not completely decoupled from the world’s stock markets. Across the Persian Gulf, stock markets are way down, as investors begin to panic.

Even the boomtown of Dubai, which may have the most high-profile real-estate market anywhere, has softened against tightened credit.

But a slowdown in the Persian Gulf might feel like a crash landing in places like Egypt, Jordan and Syria, where gulf money has helped prop up strained economies.

“I expect investments from the gulf to slow down or stop because they have to deal with their own problems before they invest in other countries,” Nabil Samman, an economist who runs the Damascus-based Center for Research and Documentation, told the New York Times recently.

But is it a slowdown or a crash?

The governments of Kuwait and Saudi Arabia are now in the throes of their national bank bailouts to the tune of tens of billions of dollars. And it’s not due to just low oil prices, but a mass exodus of foreign capital and unfavorable currency trades.

At this rate it’s bound to get worse as we approach 2009. Some experts are predicting oil prices of $50-$60 per barrel for next year.

If that turns out to be the case, world credit markets could wish oil were once again up to $150.00.