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interesting article

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    Picked this up from OZL thread. Definitely an interesting read.

    Link is :

    The turn of the markets and the rise of commodity stocks
    Government-created infrastructure rebuilding and development programmes could bring commodities back to the investment forefront sooner rather than later.

    Author: Dr R Haghighat, PhD (UCL)
    Posted: Monday , 10 Nov 2008


    The G-20 meeting in Brazil over the weekend has unwittingly set the foundations for the devaluation of cash, rise of commodity stocks and the turn of the market worldwide. It does not pay off any more to hoard cash in savings accounts soon paying little more than 1 to 2 per cent. Money has to be diverted to more profitable investments and, in the middle of this development, the turn of the market is in sight.

    Among other recommendations, the G-20 meeting, while admiring those Governments which have already taken or going to take bold action, advises Governments to cut interest rates further and to spend. This resonates with President-Elect Obama's plans and his ambitious infrastructure reconstruction programme and China's weekend announcement of a nearly $600 billion investment project for rebuilding houses destroyed in the summer earthquake and still more infrastructure projects: railroads, airports, subways and bridges. Though in doing so China may wish to benefit from current relatively lower commodity prices, such projects will inevitably lead to revaluation of commodities.

    In a recession Governments have to reduce interest rates, cut taxes, but also borrow at low rates, develop projects and create jobs to turn on once again the machine of consumption so that the private sector revives. Current Government projects in at least two of the largest economies of the world, America and China turn mostly around infrastructure developments. Obama is going to take his infrastructure plan to Congress immediately after his presidency inauguration and the dawn of the re-construction programmes in America and China will be at hand in less than 6 months' time. Materials are required for infrastructure developments. This means there is going to be a rebound in commodity stocks (more future-bound than commodities per se) as well as in commodities themselves. And the markets are not going to wait six months to realize what is happening.

    Compared to Western Europe, the US has an old, inadequate and decaying infrastructure neglected for decades as maximizing return on capital has been more of a pre-occupation than renovating the infrastructure. America can now turn this disadvantage into an advantage. When is a better time to renew the infrastructure than when doing so provides jobs and saves an economy? But to do so America needs something else: borrowed money. It has to borrow mega sums though only years and years later worry about how to pay it back. But the Fed has already prepared the ground. Low interest rates are not just for individuals, banks and other entities but for the Government too. Cheap money borrowed at low interest rates is what the Government needs. But the gigantic scale of work throughout the US means mega sums need to be borrowed. The mega borrowing is likely to devaluate the dollar which in turn will increase the price of the dollar-denominated commodities including oil as these become cheaper for holders of other currencies. The rise in the price of commodities will again increase the value of commodity stocks.

    Therefore, the recent decline of commodities is going to be a short-term story as the same recession that caused the fear of declining construction and reduced use of steel and copper is going to increase the use of these metals. This could be to colossal proportions through policy developments as more Governments in advanced economies as well as emerging ones start borrowing at low interest rates for a number of projects including re-building railways, roads, bridges and airports in order to keep their populations employed.

    This macroeconomic analysis confirms the prediction by Teun Draissma Chief Strategist from Morgan Stanley in his recent buy advice to institutional customers based on a full-out buy signal in European market charts. This is going to be especially true in markets heavily weighed by commodity stocks such as the London FTSE 100. Even though most company results are going to be ugly looking throughout the rest of the year and into 2009, this is already known to the market and priced into current valuations. Any downward fluctuations are going to be at least compensated by the strength of commodity stocks. These stocks were resilient and the last to come down in the market decline since May and are now going to be the first to rise.

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