Why The Commodity Bust Will Last For Years

[Dogmatix]

An interesting article from ZeroHedge, with obvious impacts for Australia: http://www.zerohedge.com/news/2015-09-12/miracle-cataclysm-why-commodity-bust-will-last-years

I suggest reading the article as it has charts to go with it.

*snips*
China is several countries centrally governed by a ruthless power elite with vested interest in maintaining the status quo. To expand their own power, wealth and status all they had to do was open up their borders to foreign capital and supplying it with slave labour. It is not very difficult, even a communist can figure it out. However, as the economy evolved it needed investments in infrastructure which was easily funded by stealing workers savings (financial repression on a scale the Yellen's and Draghi's of the world can only dream off) and funnelling it into state owned enterprises with lucrative government contracts. They didn't even have to pay lip service to property rights as all property was and still is held by the state. In short, this stage of economic development involves resource allocation from the centre. As Michael Pettis argues in The Four Stages of Chinese Growth centralised capital allocation gets a tremendous support from the rent-seeking elite and are thus easy to implement.

...

As the deflationary excessive capacity kills every chance of ever repaying the mountain of bad debt piling up on the Chinese balance sheet the most tempting thing for the elite do is to double down on failed policies, such more infrastructure investment spending (paid for by the workers toil) and obviously suppress bankruptcies by bailing out failed industries (owned by the elite).

While this will cushion the blow in the short term, it is destined to lower the overall growth for a long time to come. Japan's clumsy handling of the bust in the 1990s is a perfect example. The European and American response to the GFC are also textbook examples of how not do deal with a crisis.

As China faces it's most important crossroad since Deng Xiapoing opened up the country we more or less know the path they will take and by extension we know real (as in not the numbers provided by the Ministry of Truth) growth rates will disappoint sell-side analysts for years to come.

But it gets even worse. China also faces a demographic tax that alone is enough to reduce growth rates considerably. The potential labor force is already growing at a slower pace than the overall population and will even shrink from 2017. In 2015 the median age in China was 37 years, and will move steadily upwards, to 39 in 2020 and 41 in 2025.

I suspect that it is becoming likely the poor of China will cause civil unrest when this all goes to hell. It was very hard to unite China in history, and i suspect it will become hard to unite it in the future too - unless they have a common cause (no points for guessing what that might be).

 

[Dogmatix]

I feel sorry for the poorer Chinese, who are the ones that will cop the brunt of problems, without reaping the real benefits of the boom.

 

[SpacePete]

I wonder when they'll play the war-card?

 

[SpacePete]

People have pointed out that commodity busts can last for several years and even decades. The question for us here in Australia is how we will be impacted by the convergence of this slackening commodities demand and a government unable to even acknowledge that it is a possibility?

Someone in the comments pointed out that it may not be over just yet. There could be another desperate round of money injection:

Commodity downturns often last decades, it's nothing new, they are know to last almost 3 decades some times, so it would be exceptional if a commodities bust and downturn lasted less than a decade simply because the boom occurs within a speculative financial misallocation and ruination of economic capacity (over-capacity) and thus long-term damage to investment conditions. It normally takes most of a generation before the next bunch of speculative chumps do it again.

But that's not the case where governments panic and blow an even bigger bubble, as a faux recovery, that still does not and can not take, due to it also just being more of the same thing that caused the downturn the boom/bust to occur in the first place.

So there can still be a rapid recovery to boom conditions, even at this late date in the debt cycle, but if there is, it will be even more stilted than the last return to re-blown bubble 'boom' conditions, and prices.

So don't go all-in on there not being yet another (abridged) v-shaped boom yet to come, as it can still happen, just like it happened in 2009, if there is enough panic to inject the stimulus for it, combined with low prices (which we have) and low commodity currencies (which we have) and low oil prices (which we have), and low inflation, (which we have).

The only ingredient missing for a boom is rapid global stimulus injection (from panic).

So don't assume this is all over just yet, as it may not be.

 

[bordsilver]

The question for us here in Australia is how we will be impacted by the convergence of this slackening commodities demand and a government unable to even acknowledge that it is a possibility?

I'd say the current govt has acknowledged this possibility from day 1. That's was part of the narrative for cutting the expenditure and getting back to surplus asap in the first budget. (Whether they were too soft is another issue.) The problem is that they have largely been unable to sell the narrative to the opposition and some cross-benchers who do wish to ignore the possibility and not only keep unfunded spending promises but add yet more spending.

 

[SpacePete]

The question for us here in Australia is how we will be impacted by the convergence of this slackening commodities demand and a government unable to even acknowledge that it is a possibility?

I'd say the current govt has acknowledged this possibility from day 1.

I'd like to see where Joe Hockey or Abbott specifically stated that the China downturn and global slackening of demand is a serious issue for Australia. We're seeing just the opposite in their current rhetoric with Hockey going on about our "prosperity momentum" and that he expects strong growth in China. The "budget emergency" rhetoric has completely disappeared.

...That's was part of the narrative for cutting the expenditure and getting back to surplus asap in the first budget. (Whether they were too soft is another issue.) The problem is that they have largely been unable to sell the narrative to the opposition and some cross-benchers who do wish to ignore the possibility and not only keep unfunded spending promises but add yet more spending.

Spending continues unrestrained, and it can't all be blamed on the opposition. Spending under the Abbott government is now at a higher level of GDP than in all but one of Labor's years in government (the GFC stimulus).

 

[SpacePete]

What commodities bust? Things are apparently going really well according to the public commentary coming out of our government. Here's some quotes by our treasurer on demand for Australian commodities and the future of our economy:

May 12, 2015

JOE HOCKEY: we are actually seeing enormous potential growth out of India, and a range of other places. And India will be our next China. There's no doubt about that... And that is going to be demand for not only our iron ore over time, but also our gas and a range of other energy commodities we can get them.

[Interviewer] So that's the big gamble, because nobody really believes that China has got full 7 per cent growth and is likely to continue it.

JOE HOCKEY: Well, I believe it, I believe it. ... the output from China and its contribution to the rest of the world is not diminishing. It's still growing as an economy.

14 July, 2015: "So far as I am concerned and the Treasury is concerned, our budget forecasts for the Chinese economy remain unchanged. We expect growth of 6.75% this year, 6.5% next year and 6.25% the year after, so our relationship with the Chinese economy remains unchanged by recent volatility,"

Aug 15, 2015: "We've got prosperity momentum"

Aug 15, 2015: "I'm still confident about our forecasts from the May budget and I remain more bullish about the region and the global economy than others,"

Aug 25, 2015: "I'm absolutely confident, absolutely confident, that the fundamentals of the Australian economy and the global economy are still good, are still good. Without doubt, that is the situation."

Sep 3, 2015: "There is no risk of recession in Australia,"

Sep 8, 2015: "I think there's a general misread of the performance of the Chinese economy and the determination of Beijing to make sure its economy continues to grow, and grow relatively strongly,"

Sep 8, 2015: "Our volumes of iron ore -exports to China are the highest level ever, and they're going to continue to grow in volume"


Aug 17, 2015

JOE HOCKEY: so I am more bullish about Australia. Well I'll tell you why, because I mean I spent, you know, while everyone was talking about other issues I spent two days in discussions last week with one of the most powerful figures in the Chinese economy, the second-biggest economy in the world. And I have no doubt in my mind that the demand for our resources is going to continue to grow. In fact iron ore exports are at record levels in volumes and the prices on iron ore, Michael, that we're getting at the moment are exactly what we forecast in the budget.

MICHAEL BRISSENDEN: So you don't see that this problem with the long-term deficits is something that is insurmountable, it's something that is not going to put a hand brake on the economy?

JOE HOCKEY: Well only the Coalition is getting the budget back to surplus and we've laid down a plan

MICHAEL BRISSENDEN: Well it's taking a very long time, isn't it?

JOE HOCKEY: Well we could go much faster but there's two things. One is we'd harm the Australian economy if we were to go faster. Secondly when we make a commitment we want to be able to deliver it.

 

[valuecreator]

In the last 300 years, commodities have followed a 57 years cycle (give or take 2 years).

Right now is a correction, like in 2008.

Commodities are set to boom until the end of the 20's.

ps. the money has to go somewhere... DEUTSCHE BANK: We examined 200 years of data and concluded stocks, bonds, and housing are at 'peak valuation' http://www.businessinsider.com.au/d...sing-near-peak-valuation-2015-9#ixzz3l8zgO3Ak

 

[billybob888]

if you sit on your arm chair and read western media, your impression of China is that of a corrupt communist bubble ready to burst or even collapse with social unrest and political upheaval

But as a middle class Chinese growing up in China, I've seen real changes in the standard of living in the past decades. I still vividly remember the old days when we still used a coal cylinder stove. And the real progress when we got our first gas stove, our first television, telephone, shower and air condition. Those so called "failed policies" has lifted most amount of people out of poverty in the shortest amount of time in human history (myself included). I dont think most people here realize just how poor the chinese were 30 years ago, when millions died from starvation. Obviously they still have a shit load of problems and are nowhere near as developed as the western world, but compare to where they were 30 years ago, the average quality of life has improved drastically.

 

[SpacePete]

if you sit on your arm chair and read western media, your impression of China is that of a corrupt communist bubble ready to burst or even collapse with social unrest and political upheaval

But as a middle class Chinese growing up in China, I've seen real changes in the standard of living in the past decades. I still vividly remember the old days when we still used a coal cylinder stove. And the real progress when we got our first gas stove, our first television, telephone, shower and air condition. Those so called "failed policies" has lifted most amount of people out of poverty in the shortest amount of time in human history (myself included). I dont think most people here realize just how poor the chinese were 30 years ago, when millions died from starvation. Obviously they still have a shit load of problems and are nowhere near as developed as the western world, but compare to where they were 30 years ago, the average quality of life has improved drastically.

I don't think anyone is saying that life hasn't improved dramatically for many people in China. The question is, will the pace of growth continue? What will be done in an attempt to maintain growth and to ensure social stability?

 

[Caput Lupinum]

A move from an export driven economy to a successful domestic consumption economy would be the way to go. It's always a bumpy transition though

 

[willrocks]

I dont think most people here realize just how poor the chinese were 30 years ago, when millions died from starvation.

Millions died from starvation directly from Mao Tse-Tung's idiotic policies, not because they were poor.

 

[trew]

yada yada

I remember reading newspaper articles just a few years ago explaining why the commodity boom was going to continue for another 20 years

now the predictions are the bust will go on indefinitely

nobody has a clue


Commodity stocks used to be called CYCLICALS for a reason !

 

[billybob888]

I dont think most people here realize just how poor the chinese were 30 years ago, when millions died from starvation.

Millions died from starvation directly from Mao Tse-Tung's idiotic policies, not because they were poor.

So they were rich?

 

[SpacePete]

I dont think most people here realize just how poor the chinese were 30 years ago, when millions died from starvation.

Millions died from starvation directly from Mao Tse-Tung's idiotic policies, not because they were poor.

So they were rich?

I'm guessing that the greatest genocide of the 20th century included rich and poor alike. I wonder if the true extent of the suffering and death under Mao will be written out of Chinese history?

 

[JulieW]

I'm often amazed at the effect of propaganada, and at a deep societal level.

I was listening to some history of Stalin's daughter, who defected at first opportunity and who was loved by Stalin, as described by one of the Kremlin overlords, 'as a cat loves a mouse'.

Point of the story is that the massively sickening death warrants signed by Stalin, often for 30 or 40 thousand people in the afternoons 'signings' had little or no effect on Stalin. Most ordinary people would at least take pause, but Stalin regularly signed warrants for that 30 or 40 thousand, and then retired too dinner and one of the comedy movies he was fond of. The psychopaths who rule are just that - psychopaths. If we're lucky we end up with just a sociopath.

The point of this being, that Stalin received hundreds and thousands of letters from the populace seeking is intervention as 'obviously mistakes have been made'. Letters of appeal to the very executioner who had been painted as 'Uncle Joe', father of the revolution with a boundless love for the people.

Mao had a similar ruthlessness and that history is truly shocking, though hardly less shocking than the control of the emperors who went before him.

Render unto caesar and keep your distance from leaders!

As for commodities - nobody knows except those leaders, and they're not going to tell YOU!

 

[Clawhammer]

Millions died from starvation directly from Mao Tse-Tung's idiotic policies, not because they were poor.

So they were rich?

I'm guessing that the greatest genocide of the 20th century included rich and poor alike. I wonder if the true extent of the suffering and death under Mao will be written out of Chinese history?

True that socialsm always leads to mass loss of life (Russia under Stalin, China under Mao, Cuba under Castro, Zimbabwe under Mugabe... etc
But then, the move into (Crony) Capitalism during the Great Depression also resulted in widespread starvation, death and suffering...
I suspect the only thing we can be sure of that "Change" leads to death. :/ ?

 

[mmm....shiney!]

@JulieW, that's been a popular topic of discussion among social and political students and academics for some time, the Nazis being one group which often form the centre of such discussions. Their passion for genocide during the day and for Mozart at night.

 

[phrenzy]

I dont think most people here realize just how poor the chinese were 30 years ago, when millions died from starvation.

Millions died from starvation directly from Mao Tse-Tung's idiotic policies, not because they were poor.

China averaged one regional famine a year for nearly a millennia, yes that was awful, the famine under Mao has no parallels, but the ability of China to achieve did security is no small feat and happened under the CCP. Love them or hate them.

 

[willrocks]

I dont think most people here realize just how poor the chinese were 30 years ago, when millions died from starvation.

Millions died from starvation directly from Mao Tse-Tung's idiotic policies, not because they were poor.

So they were rich?

The rich fled to Taiwan with most of China's gold. They avoided the worst of Mao's idiocy.

Those who stayed quickly became poor under Maoism. The starvation wasn't as a result of being poor, it resulted directly from Mao's policies.