Five things I learned this week: Oct 28th 2012

Steel makes up for 95% of the world’s metal production (<$300B market), compared to $3T market for crude.  For the longest time, iron ore prices were driven by Japan’s biggest producers (Nippon Steel), and production was steady and prices were relatively stable. In 2003, China eked out Japan as the largest consumer but it didn’t have large steel producers so the practice of prices negotiated with iron ore producers such as Vale, Rio Tinto, BHP BIlliton ended. Prices since 2010 are driven by the spot market, which accounts for the volatility in iron ore price. (HT: http://www.economist.com/node/21564559)

My guess is that those of us marginally familiar with NY Federal Reserve’s POMO, think of purchases being overwhelmingly driven by the designated primary dealers, with individuals purchasing from TreasuryDirect.gov making up for the balance. But, I learned that a large chunk of purchases recently have been driven by “direct bids” by institutional investors, up to 18% in the last week, up from recent average of 12%. This is a very interesting statistic, as these purchases are most likely by institutional investors who do not want to expose their books to the primary dealers.

Africa’s landmass can fit United States, China, Western Europe, India, Eastern Europe, Mexico, Iberia and Japan. With room to spare.

Nigeria (population 162m) will overtake United States as the third most populous country with over 300m people by 2055. Sub-Saharan Africa, which now accounts for 12 percent of the world’s population, will account for more than a third by 2100, by many projections (NYT: http://www.nytimes.com/2012/04/15/world/africa/in-nigeria-a-preview-of-an-overcrowded-planet.html?pagewanted=all).For investors who are starting now, there’s a good chance that their careers will be shaped by rise of Africa.

Japanese government bonds’ endgame is near. Many investors have lost money betting against the JGB and have seen Japan’s Debt/GDP raise to over 225%. According to the paper, this has been financed by the household sector (who continue to save in light of deflation), corporate sector and the Japanese pension fund. But, sometime in the next less than 10 years, this will all have to come to a screeching halt as Japanese population ages and starts consuming its wealth as opposed to saving it (taking the buying power out of the household sector and the national pension fund). Foreign asset purchases by Japanese companies (e.g. Softbank’s $20bn Sprint bid) could also divert liquidity away. A paper by IMF describes this very well (see http://www.imf.org/external/pubs/ft/wp/2011/wp11292.pdf). When this happens and JPY/USD falls, Japanese stocks may boom and Korean (and Taiwanese) carmakers and technology companies may get a shock as suddenly Japanese companies will become very competitive in the international market.

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