By Graham Irvine the London Irvine Report
I have been growing increasingly concerned over H1 2015, that supposing the great commodity bust, isn't just the ending of the Commodity Supercycle, Bloomberg Dec 1998- June 2008, but was the biggest of the mis and malinvestment bubble of the era of the Great Nixonian Error of fiat money, August 15, 1971 to present.
The collapse of the Great Chinese Stock Bubble last month evaporating 3-4 trillion USD of phony Chinese wealth, far from being a non-event as per a Wells Fargo's note of about 10 days ago, was instead a triggering event for the next phase, from commodity deflation into outright commodity depression. So far China has put together measures worth about 10 percent of China's GDP to try to support the market. Easy to do in a largely command economy, with most selling banned, short seller's facing jail or worse, and the media ordered to only cover good news stories.
But apart from advancing new margin loans to cover earlier loans now gone bad, good money after bad, fiat direction of the stock market makes no more economic sense than the state setting selling prices in any other market, foodstuffs, cotton, clothing, autos, etc. China's factory sector is now in contraction at the fastest pace in 15 months. Last week's flash PMI was 48.2, for a 5th month below 50.
Chinese capital flight this year has now reached 520 billion, in a controlled economy where capital flight is impossible for most outside of the "Princelings." The Princelings seem to be exiting China. What do they know that we don’t? Playing Devil's Advocate, our global commodity producers have malinvested for a demand that was a one-off mirage.
Like American oil frackers, no matter what the price, they simply have to go on over producing, if only to keep some cash flow to service debt. But the collapse in copper, has already triggered a strike at Codelco, Chile. In silver, a strike and social trouble in Potosi, Bolivia. Just last week 6000 miners learnt of their imminent firing in South Africa.
China's bust, is generating contagion. Internally to the already struggling housing market. Internationally to the BRICs. Emerging market currencies are mostly in free-fall v the dollar.
Continuing as Devil's Advocate, a commodity depression, will continue to slow the global velocity of money. Layoffs rise, people worry about the future, their future. Corporations receive less cash per ton. They cut back expenses. The higher the dollar, the more non dollar nations must cut back on dollar based commodities and goods. The more US exports become pricier, the less demand for them. Blow back reaches America, albeit America doesn't rely on exports to the extent of China or Germany.
A commodity depression will also lead to cut wages for those not getting fired, as we already see in Australia. 10 percent for iron ore workers, and that's just the start. And then, according to the Fed's leaked figures, Fed funds are supposed to rise to 0.35% by year end. 1.26 percent by year end 2016. 2.12 percent by end 2017. 3.24 percent by end 2020.
Forget Greece. On that timetable, all of Club Med becomes Greece before 2020. Europe gets another banking crisis. Finally as Devil's Advocate, who will invest for the future except at the margin in isolated opportunities, given such a bleak outlook?
https://en.wikipedia.org/wiki/2000s_commodities_boom http://www.bloomberg.com/news/articles/2015-07-23/vale-says-iron-ore-output-was-second-highest-ever-last-quarter http://www.reuters.com/article/2015/07/24/us-markets-global-idUSKCN0PY01520150724 http://www.reuters.com/article/2015/07/24/us-china-economy-pmi-idUSKCN0PY04V20150724
Source: London Irvine Report