Tuesday, July 28, 2009

Commodities update

The rebound in industrial metals (and most commodities, for that matter) is impressive. It's very hard for the economy bears to explain this. I think it clearly reflects both a monetary impulse and a growth impulse, and a lot more of both than the market seems to be thinking.


Public Library said...

Chinese companies have a green light to buy, manufacture, or speculate in whatever is necessary to distribute the capital mandated by the government.

Your dismissal of the magnitude of Chinese purchasing power is reminiscent of the misunderstanding of the impact of Chinese purchases on US assets that drove yields to unsustainable lows. Which I might add, sent false signals to market participants.

Why is it that you think the Chinese cannot move the metals markets in the same vein they did other asset classes over the past 5-10 years? $500B or a $1T worth of purchases can go a long way. Not to mention the false signals it sends that drive others into the market in classic fashion.

The shape of the Chinese problem has taken on a new form, not disappeared like some seem to suggest.

Scott Grannis said...

I'm fully aware of China's stimulus spending, but I just don't see how it could be distorting the market for just about every single commodity on the planet. China's working population is growing much faster than most other countries, it is an exporting powerhouse, its currency is stable, and it has trillions of reserves. It's economy has been growing 9-10% a year for many years, and will undoubtedly grow almost that much this year. Yes, China is having an impact on the global economy, but I don't see how you can argue that their stimulus spending, only a fraction of which might be going to stockpiling commodities, is overwhelming their otherwise positive fundamentals.

Public Library said...
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Public Library said...

I read a good article the other day that used a simple analogy during the dot-bomb era to equate the current Chinese domestic boom to the value destruction model used by Lucent Technologies during the golden years.

Lucent once sold product to well capitalized companies that could afford its products with cash. When that dried up, they turned to start up companies who could purchase their product but with borrowed money/private equity. Finally, when that market shriveled, Lucent offered attractive financing to its customers in hopes they would one day pay off their massive expenditures with actual earnings/cash flow.

Lucent-Alcatel is now a $2 stock. The Chinese government is shoveling out money for anything so long as it produces jobs to avoid civil unrest, regardless of the eventual market implications of these actions.

Soon China will implode from the over investment and risky behavior embarked on by their government. The Chinese are no better at meddling in markets than any other country and it is plain to see how this will end in disaster.

It is very easy for me to see how China, in the midst of a government led boom of gargantuan proportions, can seriously impact every nook and cranny of the global marketplace. Their meddling helped implode the US and it will surely assist in sinking their own battleship.