Nordic Association of Electricity Traders 15 th anniversary of NAET in Paris

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Nordic Association of Electricity Traders15th anniversary of NAET in Paris

David Fuller 14th April 2011

Bubbles, Supercycles and the Next

Three Big Energy Stories


The Art of Bubbleology

What are the two really big bubbles today?

Can you identify them?


September1981 US 10-yr T-Bond Yield

28-year bull market overSecular bear market beginning

Does it make sense to buyat these yields?

Yield should at leastover next ten years


30-year T-Bond futures - (My Baby Steps tactic)

Expecting a ranging downwardbias, I short lightly on ralliesand cover incrementallyon declines


JPY/USDYen bubble burst by

multilateral intervention

G-7 sells JPY


USD/JPY – From ¥360 to ¥76.25on 17/03/11 – G-7 intervenes on the following day


Happiness in forex is having the central bank(s) and the trend on your side.


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.


Using Baby Steps, Ibuy on easing and lighten on rallies, looking for ¥90 to ¥100


Same tactic applicablefor EUR or any other currency against the yen


Supercycles

Do you see any?


Continuous Commodity Index (Old CRB)

An equal-weighted geometric average ofcommodity price levels relative to the base year average price

Supercycle 1971 to 1980

Supercycle2001 to 20??


Continuous Commodity Index (Old CRB)Semi-log scale


Which global economic trend do you think we will we see:

1.Depression?2. Muddle through?3. Supercycle?


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 Bank15 November 2010


“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 Bank15 November 2010


“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 Bank15 November 2010


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


The next three big energy stories –what are they?


1. Shale gas

2. Shale oil

3. Nuclear renaissance (subject to governance)


Source: US Energy Information Association (EIA) April 2011


Regions currently known to have shale-gas reserves


“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.


The nuclear renaissance was finally underway,

until…


Nuclear Godzilla Unleashed


The biggest nuclear risk -

Most the reactors used todaywere built in the 1970s – 1980s.

No wonder they leak!


Fuel for the Pebble Bed Reactor – meltdown free?


Pebble Bed Nuclear Reactor


Pebble Reactor Nuclear Fuel


Where does their electricity come from?


Uranium (MBURNXRE)


Shall we look atsome stock markets?

The best ones will have already surpassed or at

least equalled their 2007-2008 highs.


Stock markets are currently caught within a tug of war.

Commodities vs Liquidity

Consequently ranging is occurring,albeit within a cyclical bull market.


Denmark


Finland


Fortumyield 4.25%


Norway


Sweden


David, SPX historic, semi-log here

Box and label the valuation contraction cycles

Secular valuation contraction

1967 to 1982

Secular valuation contraction

2000 to 2015?

S&P 500 Index since 1953

Updated through30 Sept 2010


S&P 500important because

of leash effect

Susceptible to further mean reversion towards rising MA


S&P 500 ÷ Gold Bullion


NDX 100 above 2007 high, outperforming S&P 500but still susceptible to MA mean reversion


German DAXsusceptible to further

ranging mean reversion


Fullermoney secular equity themes:

Asian-led emerging (progressing) marketsCentral and South American-led resources marketsPrecious metalsIndustrial resourcesSupply inelasticity themes such as energy and waterGlobal infrastructure developmentInformation technologyWestern multinational leaders leveraged to global growthDividend ‘aristocrats’


How many of you are bearish of China?

List reasons:


Property bubbleGhost citiesDesertificationAging populationInflationAuthoritarian governmentCorruptionCommand Economy


Ancient civilizationHuge populationWork ethicSelf-beliefEducationCommand capitalismHuge foreign reservesVisionary planning


China Shanghai A-Shares

Massive issuance ofgovernment held, previously unlisted shares to raise bankreserve ratios from Aug 2009 to Nov 2010

Now has medium-termupside breakout potential


Hang Seng China Enterprise H-Shares(Medium-term breakout potential)


Hong Kong Hang Seng Index(Medium-term breakout potential)


India(a long-term Fullermoney favourite)


India Sensex Index(rocked by corruption and inflation but one of the best for the long term)


Indonesia – An ASEAN leader


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 reservecurrency but probably not before 2050


Asian Dollar Index


Latin American Dollar Index(not good in a recession)


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


Continuous Commodity Index (Old CRB)(currently overextended relative to MA)


Gold bullion (monthly)

Secular bull marketsusually end with a dramatic

upward acceleration

Sep ‘03

Sep ‘05

Sep ‘07

Sep ‘09

Sep ‘01 Updated through1 October 2010

Note the 2-yearcycles


Gold


Gold, (CPI Inflation-Adjusted)


Silver(currently overextended

relative to MA)


Silver (CPI Inflation-Adjusted)


Crude Oil (Brent


Crude Oil (Brent)(overextended relative to MA)


Medium to longer-term risks

• 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


Current bull points

• 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)


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


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


Climate Change


Thank you very much

Fullermoney is aGlobal Strategy Service

produced byDavid Fuller

&Eoin Treacy

We invite you to visit our sitewww.fullermoney.com

Nordic Association of Electricity Traders 15 th anniversary of NAET in Paris

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