Sunday, May 20, 2012

China Said to Be: "Hand to Mouth"; No, That's Not an Old Chinese Saying, It Means the Commodities Bears Are Feeling Their Oats (If Bears Eat Oats)

Sometimes it just seems as though Groundhog Day got it right.  Almost exactly one year ago, I wrote the following blog post, which soon enough proved highly accurate:  Goldman Wrong on Rates, Zero Hedge Wrong on Oil As Deflationary Side of Biflation Begins Its Ascendancy (June 8).  Well, Zero Hedge might be correct that 2011 is being repeated this year... but it's possible that presidential election years could be starting a new pattern.  Heavens forfend, it could be more like 2008.

Here's a new reason why:

Today (May 21) we see this breaking article from the Financial Times.  Its  focus is on raw materials but it also contains bearish commentary about China’s overall economy.  Here are excerpts:

Singapore/London: Chinese consumers of thermal coal and iron ore are asking traders to defer cargos and – in some cases – defaulting on their contracts, in the clearest sign yet of the impact of the country’s economic slowdown on the global raw materials markets.
The deferrals and defaults have only emerged in the last few days, traders said…

“China is hand to mouth at the moment.”...

Other key economic indicators followed by Chinese policy makers, including electricity consumption, rail cargo volumes and disbursement of bank loans, point to a sharper slowdown, suggesting the risk of a hard landing.

Soft commodities such as soyabeans and cotton have also seen Chinese customers default in the past two weeks, a trader at a third global trading house said…

Highlighting a “worrying” weakness in consumer spending inside China, Kim Youngha, the head of Samsung’s China operations, said he expected the domestic market for technology goods to grow 7 per cent this year in China, down from 10 per cent last year.
Yu Song, analyst at Goldman Sachs, told clients last week that Chinese economic activity was “exceedingly weak”. 

A number of the individual commodities that I follow on the futures boards look technically poised for a relief rally.  The biggie, oil, does not look as promising-similar to last spring.  And, gold is trading at a massive premium to platinum- that should be bearish for gold.  It is indeed possible that since gold trades as a currency and platinum is an industrial metal with important jewelry and investment uses, the traditional discount that gold has carried to platinum ever since catalytic converters came into use may be fading away.  Nonetheless, I'm not brave enough to be favorable to gold prices unless I were even more bullish on platinum.  And all I'm willing to say about platinum is that it's had a huge price drop recently, so short-term it probably a good trade, but given the above news out of China (which echoes the thrust of a NYT article published within the past week), I'm wary that we're going to face a 2008-style commodities liquidation event.  So I'm basically waiting until I see the whites of the oil market's eyes before arguing with the FT per the above report. 

It's the nature of markets to condition investors/traders to one pattern, then do something different.  The resilience of the markets the past three years may simply be failing as real European economic activity continues to surprise to the downside.

Not to overdo the bearishness, but I've been in the markets well over three decades, handled my portfolio well in the 1987 crash and got completely out of stocks in 2000 and again in summer 2007.  So for the many mistakes I've made, I've been lucky re crashes and want to post this from this week's Hussman Market Comment which I just noticed before posting the above:

As John Kenneth Galbraith wrote in 1955, "Of all the mysteries of the stock exchange there is none so impenetrable as why there should be a buyer for everyone who seeks to sell. October 24, 1929 showed that what is mysterious is not inevitable. Often there were no buyers, and only after wide vertical declines could anyone be induced to bid ... Repeatedly and in many issues there was a plethora of selling orders and no buyers at all. The stock of White Sewing Machine Company, which had reached a high of 48 in the months preceding, had closed at 11 on the night before. During the day someone had the happy idea of entering a bid for a block of stock at a dollar a share. In the absence of any other bid he got it."

When the Financial Times publishes the above article on a Sunday, it's my opinion that this news has not made its way into speculative commodities prices.  "Deflation" might be afoot.  Keeping dry investment powder, and being patient with it, is my major current strategy.  To paraphrase Louise Yamada reminds investors (she said it before Jim Cramer):  there's always a bull market somewhere during a decent tape and decent economy.  In other words, prices can rise, and it's OK to be in cash at that time.  I just don't like to lose the most precious financial asset of all:  capital.   


  1. Let's face it: due to the need for massive deleveraging the dominant economic process for the foreseeable future is deflationary.

    The process will be punctuated by brief inflationary interludes when the pain caused by deflation is so bad that some money is injected to calm the masses.

    In other words expect more of the last three years.

  2. Did not the Red China report excellent GNP numbers of .8% ?