June 11, 2006 at 8:32 AM #6705
Following Zeal recommendations requires you buy into the Jim Rogers logic: there is a long-standing supply-demand imbalance created by a lack of mining for many years, and a rising demand for commodities as China and other Asian countries grow to the size of the US.
Well, let me burst their bubble. When the US economy went into the 2000-2001 recession, commodities and the Asian economies saw their stock markets go into a tailspin. “Table 9.5 [Dollar Crisis] shows that economic growth rates in 2001 slowed greatly in every rgion of the world except Africa. The slowdown in growth ranged from 24% in the transition countries to 91% in the newly industrialized Asian economies.”
Commodity prices fell. The World Bank data shows annual average 2000 vs 2001 prices of these commodites fell as follows:
Iron ore 4.3%
Steel ind -12.6%
Other big moves those years
Plywood – 8.6%
Crude oil -13.6%
Remember that in the US, consumer spending is 2/3 of the economy. Capital spending and government spending make up the rest.
Realize that the 2000-2001 recession was a capital spending recession. The US consumer did NOT cut back, yet every Asian economy went into a recession! Even lumber prices went down. Our 2000-01 recession was not only mild, but quickly bailed out by the Fed which lowered interest rates to 1%.
What will happen to copper, lead, lumber when the housing industry tumbles, and the US Consumer cuts back? Things will be much worse next time.
Our upcoming recession, which we are just starting (but the economist and newspapers won’t report until next year), will tumble the base commodities and Asian economies. Those economies have low wages, and their people cannot afford to buy the goods they make. Thus, their sales are completely dependent on sales to China, which is completely dependent on sales to the U.S.
I e-mailed Zeal, alerting them to this. While their technical assumptions are fabulous, none of that means anything when the fundamentals are incorrect. They mistakenly believe that demand from China is causing a secular bull in bae metal commodities. When the US recession starts, the commodity bull is over!
Cash remains king in the next recession. The only question: what form of cash? Euros, gold stock, gold bullion, dollar CDs?June 11, 2006 at 10:36 AM #266204plexownerParticipant
China is a tough country to base economic analysis on.
I keep in the back of my mind that China is hosting the 2008 Olympics and the World Expo in 2010. They are also working towards joining the WTO somewhere in the next few years.
They also have an aging ruling class that knows they have to keep the people happy or they will be out of work quick (via revolution). There are literally 100’s of millions of farmers moving out of rural China and into the cities every year. These people need jobs which means China needs a growing economy.
The massive flow of rural Chinese to the cities is causing China to build an LA-sized city every month! Think of the resources that entails. They are also building and renovating for the upcoming Olympics and World Expo. In Shanghai they are scraping 1300 acres for the World Expo site.
As with most governments, the statistics coming out of China are questionable. Some analysts believe the Chinese have been understating their growth rate for the last few years by several percentage points – instead of the reported 8 or 9%, growth is really running at 12% or so. This subterfuge makes sense because China has been out shopping the globe for natural resources and wanted to (and still do) disguise their level of demand.
One of the reasons global energy demands are increasing is because China DOES have a consumer class and this segment of the population is growing. The Chinese are willing to work for $4/day w/o bennies because they want the Western lifestyle – the cars, refridgerators, A/C, etc – this demand for resources is in addition to the resources that went into building the cities that these rising consumers are living in.
It is reasonable to assume that China would like to be a world power. I believe they could do this very quickly by offering the world a precious metals backed currency. A Chinese economist is telling the government to increase their gold reserve from 600 tons to 2500 tons quickly and the government is encouraging the citizens to buy gold. Something to watch.
These factors make me think that the Chinese will continue the status quo for a little longer. I don’t think they will start dumping US dollars and treasuries wholesale before 2009. The longer they wait the more they let their internal consumer demand develop and grow.
Summary: China is not completely dependent on the US. There are trends occurring in China that will continue with or w/o the US consumer buying Chinese goods.
Tangent 1: Casey Research (www.caseyresearch.com) is very positive on energy and precious metals stocks but bearish on the base metals stocks.
Tangent 2: I feel like I get enough exposure to the base metals via some of the precious metals stocks so I don’t take positions in the pure base metals stocks that Zeal recommends. I do like the diversity that some of the jr resource stocks offer (both Zeal and Casey Research recommend jr resource stocks): uranium / gold; gold / zinc / moly / uranium; silver / zinc; gold / iron – my portfolio is focussed on silver/gold/energy but I get some exposure to the base metals too.June 11, 2006 at 6:07 PM #26633
I have read everything you say about China, but just because they want their citizens to be as rich as us Westerners, won’t make them so. We are at the brink, if not already in, a major recession, and China is not in a position to ride out the effects, yet. In 5 years they will be, but today they have an export-dependent economy.
Becoming rich/industrialized requires trading with other countries, and having a population which can afford to buy these goods it trades. China cannot. Its citizens are too poor to trade or buy the products they make.
If becoming wealthy is as easy as producing things that your own people can buy, with money you print/provide, then every nation on earth would be rich. Becoming wealthy means that your citizens are paid enough to consume the things they make. China is a long way from that.
They also suffer from fraud, inflation, money supply growth that is unsustainable. Their M2 grows at 18% per year, the US at only 2%. Their inflation is about 8%, their GDP growth is 12%. They are out of control. Their banks hold mainly bad loans, and corruption is rampant. Their real estate bubble is as bad as ours. The government is trying to reign in the speculative excesses, but in my opinion, they make it worse by printing so much money.
Here is something nobody ever talks about. China is increasing its money supply at the rate of our trade deficit with them, because they print yuan to buy all those dollars we send, to prevent the renminbi from appreciating. They have a huge liquidity glut.
We are going to see another group of people lose money: those betting on China as the savior of the world economy. Don’t hold your breath, and stick away your checkbook. China is not ready to unleash from the US quite yet, and their fortune is tied to ours.
How will I know that China can sustain itself without the US? When I see China buy few Treasury notes, and when they let their currency float freely, they will have achieved true freedom.
Our next recession will take them along for the ride. And the commodities boom will go down, too.
Precious metals willbe the only safe haven, and I believe gold will jump to new heights. I am going to load up on gold next week, and euros. I think the euro has the chance as the world’s next reserve currency. Mainly because of the petroeuro bourse, and the economic strength of Europe. It has the bank stability.
China’s banking system is a mess, and the world economy will not allow China to provide a world currency until they get some stability. China is going great places, but it is still in baby stages. Not a mature adult yet.
The FED has no more games to play. They must choose between busting the dollar or busting housing. The dollar will lose either way.June 11, 2006 at 6:23 PM #26636PDParticipant
Those are good points. It does not seem logical that China would not have cut back on growth if we purchased less from them.June 11, 2006 at 7:26 PM #26639
PD, logic doesn’t mean much when emotions run high. Whether the emotion is about housing never going down, the importance of our military, or the insured stratospheric growth of China, you cannot convince people otherwise.I am trying my hardest to make the point that China is not a place to put your money for guaranteed appreciation. But the China bull reading this, will not be swayed.
The China bulls would say that as we buy less, the Chinese consumer is going to buy more.
I know our imports the last 2 months were less than expected, and I can’t wait to see a report about recent Chinese export activity and economic activity. I know they keep this all secret,but they’ve got to be concerned about the slower pace of orders.
For example, Ethan Allen, car dealers, Home Depot, are experiencing slowing sales. Their June orders from China are going to be down. What the heck is China going to do? Their factories are cranking at full capacity. Are they going to lay off people? Cut prices? They are already facing slower orders.
Within a couple months, China’s orders from Korea, Taiwan, and the other export-dependent countries from which China buys, will slow down.
On an unrelated note, look for the 30-year bond yield to go up, as demand for them decreases. China will buy fewer Treasury notes at our future auctions.
The reason: as the US consumer loses its equity-withdrawal power, we cut back on spending on Asian goods, sending fewer dollars to China. China has fewer dollars to offload in purchasing US assets. You will see the long-term yields rise. But don’t look for this in any media reports or economics texts. You get this exclusive only from an economics-obsessed housewife who gets her thrills exposing economists whose heads are stuck in the sand . Oops – better be careful with the imagery, in case some future employer reads this.
(Do you know that employers, before hiring, google your name and find out everything about you on the Web?)
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