For the past 7 years, the world has been living through a really ugly experiment, hyper-Keynesian economics. Included are stimuli, low interest rates, quantitative easing, and plenty of fraud to go around, from government statistics to the lack of honest accounting.
For years, investors were bullish on China, a country that was hailed as a great success from central planning, as a state-run economy with some capitalism, and perhaps a model others could look to in the future. As China fueled commodity consumption for the past 15 years, now the world has to take a serious look at what they have accomplished. Ghost cities and $50 billion bridges to nowhere were all part of an economy and job market built on air.
Now, as reality sets in for China’s future growth, a new reality needs to set in for investors: the fact that we have no idea what will be China’s new normal, because even once they hit bottom, they’ve already built cities for the next 20 years. Think of the harm this has done to a construction worker looking to enter the workforce in 5 years. What’s the point? The cities of 2025 were built in 2010.
For commodity investors, this is a disaster, which is why we suggest anyone buying a resource stock today should also seriously consider having a position in a China bear fund or ETF like CHAD. Here in the U.S., oil companies since 2009 have borrowed at artificially low interest rates in order to produce higher-cost oil from fracking, which has now helped flood the world in oil.
Only now we have lower oil prices, higher interest rates for the oil frackers, and an almost certain default, as these companies can’t pay the debt back, especially with lower oil prices that, for the most part, are unprofitable for unconventional drillers.
So what does an oil executive do in this scenario? Well, so far, they’ve tried to make up losing money on oil with volume, which obviously has only made the problem much worse.
All around the world, stock markets are crashing. Brazil is in a depression, China and Europe are in recession, and Canada and the U.S. look to be entering an official recession in 2016. The central planners have truly made the reset of 2008 ten times worse, and unfortunately, there is no silver bullet to fix this.
Did you know that the Bloomberg Commodity Index is now trading lower than it did in 2008, and after 9/11?
This is a stunning collapse in commodity prices. These companies, like Anglo American, are announcing layoffs. Anglo is laying off 85,000 people – 2/3rds of the company -- and these are all great-paying jobs. China just announced over 100,000 coal workers to be laid off…
We are living through a moment where all the trillions of dollars in misallocation and debt are unwinding, so we are going to live through a nasty deflation, but at the same point in time, we must also consider how central planners will respond. This is why there is no foolproof way to protect and profit forward – there are only strategies to hedge through this crisis.