Countries that produce the world’s energy, food, and building blocks are hurting.
On Tuesday, we told you commodities had dropped to their lowest level since 2002. As a group, commodities are down 26% over the past 12 months. And some commodities are down way more than that… like oil, which is 53% cheaper than it was a year ago. And iron ore, which is down 73% since September 2011.
The countries that produce this “stuff” are feeling the pain.
Canada is the fifth-largest oil producer on the planet. Crude oil is its biggest export. It makes up 27% of Canada’s total exports.
In a recent report, the International Monetary Fund (IMF) cut its projection of Canada’s growth rate from 2.2% to 1.5%. It was the IMF’s biggest downgrade for any developed nation.
The Wall Street Journal reported that Canada is struggling because the fall in oil “has hurt capital spending and dealt a blow to overall growth.”
Australia is the second-largest iron ore producer in the world. Iron ore is Australia’s biggest export. It makes up 22% of its total exports. Australia also exports a lot of coal, gold, and natural gas. These four commodities account for 41% of Australia’s exports.
Rating agency Standard & Poor’s is worried that the pain from falling commodity prices might spread to the rest of Australia’s economy:
If demand for Australia’s resources were to weaken sharply, a range of disorderly dislocations in the economy could occur, including in its labor and property markets.
New Zealand is one of the world’s largest dairy-producing countries. Dairy products like milk and butter make up 21% of New Zealand’s exports.
Like with other food commodities, dairy prices have fallen hard. Dairy products, on average, are 37% cheaper than they were in July 2014.
Bloomberg reports that New Zealand’s economy is “under pressure from the weakest raw-material prices in 13 years.” It added that “New Zealand is suffering from zero inflation after a plunge in whole milk powder prices to the lowest since July 2009.”
• Given the bloodbath in commodities, these countries’ stock markets are holding up well…
Canada’s stock market is down just 2.5% this year. Australia’s is down 3.1%. New Zealand’s is actually up 6.0%.
One big reason why is that their central banks were quick to ease. All three have cut interest rates twice already this year, as this table shows:
Central Bank Interest Rates
|Source: Thomson Reuters|
Central banks often cut interest rates to stimulate the economy. Lower rates make it cheaper to borrow money… which generally helps a country’s businesses and its stock market.
But low interest rates are generally bad for a country’s currency. And, as you can see in the following chart, the Canadian, Australian, and New Zealand dollars have all lost a lot of value in the last year:
The interest rate cuts have pushed all three currencies to multiyear lows. The Canadian dollar is at its lowest level versus the US dollar since 2004. The Australian and New Zealand dollars are at six-year lows versus the US dollar.
A declining currency is bad for its country’s citizens. It makes everyday items cost more. And it makes people’s bank accounts worth less.
This is exactly why we recommend owning physical gold and silver. Governments are constantly making paper money worth less. If you keep all your wealth in US dollars, there’s nothing you can do when the government decides to debase them.
The government can’t debase physical gold. You can learn how to buy physical gold with our free special report, the 2015 Gold Investor’s Guide.
• Switching gears, Apple’s great quarter wasn’t good enough for Wall Street…
Smartphone and computer maker Apple (AAPL) reported strong second-quarter results on Tuesday. Revenues jumped 33% from last year, to $49 billion. Earnings climbed 45%.
But investors weren’t happy. Apple’s stock dropped 4.2% on the news.
Most other stocks would have soared on those results. But Apple isn’t like most companies. It has set an extremely high bar. Two quarters ago, Apple made an $18 billion profit. It was the largest quarterly profit for a public company… ever.
Some analysts are worried that Apple’s iPhone sales increased “only” 35% from last year. Investment bank Cowen Group is worried for a different reason:
…iPhone units were light even adjusting for channel inventory. Normally, this would not concern us but evidence of a widespread demand reset from China is mounting…
China accounts for nearly a quarter of Apple’s sales. Apple earned $13.2 billion from China last quarter. That’s down from $16.8 billion in the first quarter.
Apple is the latest huge company to blame China for weak sales. On Wednesday, we told you industrial giant United Technologies (UTX) said that “a slowing China” was a big reason why it had a bad quarter.
• But Apple is still the world’s most dominant company…
Apple is still the world’s largest company that’s not owned by a government. It’s worth more than Google (GOOG) and Wal-Mart (WMT) combined.
Apple’s most successful product, the iPhone, dominates the smartphone market. A recent article in The Wall Street Journal explains why:
Roughly 1,000 companies make smartphones. Just one reaps nearly all the profits.
Apple Inc. recorded 92% of the total operating income from the world’s eight top smartphone makers in the first quarter, up from 65% a year earlier, estimates Canaccord Genuity managing director Mike Walkley. Samsung Electronics Co. took 15%, Canaccord says. Apple and Samsung account for more than 100% of industry profits because other makers broke even or lost money, in Canaccord's calculations.
What’s amazing is that Apple only sells about 20% of the world’s smartphones. But it makes all the money because Apple is such a powerful brand. Apple can sell tens of millions of iPhones for $600 a piece. Its competitors can’t come close to that.
Apple’s $203 billion is the largest pile of cash ever amassed by a company. There are only 13 companies in the S&P 500 that are worth more than Apple’s $203 billion cash hoard.