Jeffrey Christian: No Double-Dip Recession

Includes: CRB, CYB, FXI, XME
by: Hard Assets Investor

Mike Norman, anchor, (Norman): Hello, everybody. Welcome back to Here with me for the second part of my interview is Jeffrey Christian, who is managing director of CPM Group.

Jeffrey, we spoke about gold in the last discussion. Let’s talk a little bit about the broader market for commodities. Commodity prices are actually coming down now, as a reflection, I think, of maybe another slowdown in global economic growth. It’s interesting because with gold … you had a bullish outlook. What’s your outlook for commodities?

Jeffrey Christian, managing director, CPM Group (Christian): Right. Commodities are radically different from gold. And our view, again, looking at the economy, our view is that we are going to see a significant slowdown in the US and China and maybe some other economies in the second half of this year. We don’t think we’re going into a new recession. We don’t think that we’re going into a double-dip, although the risk is higher now, than it seemed three months ago.

Our expectations – for example, US GDP, which was running 3.5-3.8 percent in the first half of this year, probably will run 1.5-2.0 percent in the second half, and then pick up in 2011. And in China, you’ve been running north of 11 percent real GDP. Maybe it comes down to between 10 and 11 percent in the second half.

Europe actually is doing a little bit better, relatively, first half/second half, simply because the first half was so pathetic for Europe. But Europe is showing some strength. And so, what we think we’re seeing …

Norman: There’s going to be austerity and spending cuts and all kinds of what are potentially very deflationary policies in Europe.

Christian: Not only in Europe, but in Japan and the United States. And you put that together with the slower real growth in the United States and China, and you could have a softening of markets. And I think you're seeing expectations of that in the commodities markets already. So, the prices are coming off a little bit.

We don’t think they’ll fall too far, but we think that in the second half of 2010 we’ll see some softness across most commodity markets. And then as the world economy and the US economy picks up steam in 2011, we would expect commodity prices to start rising again.

Norman: What effect, if any, do you think we’ll see from the de-pegging of the Chinese currency to renminbi from the US dollar? Some would argue that it could have an impact on Chinese exports, on the Chinese economy; it could have a slowing effect. What effect on raw materials and commodity prices do you think that’ll have?

Christian: I think it’s going to be relatively minor; maybe a quarter of a percentage point change. Because what you're going to see is a shift in fabrication demand patterns. The Chinese have really done a solid to the US by saying that they're going to allow the yuan to rise. That means that their labor costs will become a little bit less competitive against the US But, it’s going to be a significant marginal difference.

And what you're going to see is a shift in fabrication demand away from China to other Southeast Asian countries, Latin American countries, the United States and Europe, to some extent. So it’s going to be probably a positive for real economic growth. And it’s really going to be a relocation of the shift in demand.

Norman: Right. The demand remains the same. It’s just shifted, maybe, some percentage away from China to the countries you just mentioned, perhaps even the United States being one of the beneficiaries. At least that’s what it seems our policymakers want to see happen, right?

Christian: And the Chinese government now feels secure enough about its own economic environment that it’s willing to allow this to happen. And that’s a very significant thing. I mean, as I said, they're doing us a big favor here, especially in the US You know, pity the poor Europeans because it’s just going to help the US and it’s going to hurt the Europeans that much more.

But they're basically saying, “Look. We’re feeling comfortable enough about our economy that we can allow this to happen.” And it should be a big benefit for the US economy and help keep us out of that second recession.

Norman: You're relatively optimistic. And I’ll reiterate a point that we brought up earlier. When I see the spending cuts, the austerity measures … and you said it even applies here … deficit reduction. That’s been the main theme of the Obama administration since the beginning of this year. In an environment where we already have 10 percent unemployment, that looks like very, sort of, contractionary policy.

Christian: Well, our expectation is that a lot of those contractionary policies really won't come home to roost until well into 2011 or 2012. They need to do that, but they're going to have to delay it because, 10 percent unemployment, and a number of other intractable problems are going to limit their policy hands. But the view is clear that, at some point, you're going to have to squeeze it out.

But you have to step back and look at it. In the last 27 years or so, real GDP in the United States has averaged about 3.5, 3.3 percent per annum. Our expectation is, over the next 10 years, it might average maybe 2.5 to 2.8 percent real GDP. So, a significant slowdown in growth that’s the effect of this long-term austerity. We squeeze the debt out of the system over a period of 20, 30, 40 years, if we do things right, and if the economic environment allows us to do it.

And that’s what we’re looking for as our main scenario. Obviously, there are a lot of big risks. And people can come up with baseball bats and whack the economy in the side, and throw us into a recession for a brief period of time, and then we’ll spring back. But that’s what we’re sort of looking for.

Norman: Now, the commodity markets historically have exhibited a pattern of equilibrium, a spike over a number of years, back to an equilibrium. Does that pattern still apply? Or is this some sort of a new era of a sort of secular rise in commodities?

Christian: I think it’s a secular shift.

Norman: Really?

Christian: There’s been an upward shift in investment and fabrication demand for commodities around the world. So, we saw commodity prices rise very strongly from 2002 to 2008. Then, they gave up all of those gains in six months.

Norman: Right.

Christian: Our expectation is the next 10 years we’ll probably see a bigger bull market in commodity prices than we saw from 2002 to 2008.

Norman: Wow.

Christian: Even bigger than that.

Norman: Wow.

Christian: And it’s based on fundamentals. It’s based on fabrication demand. It’s based on supply constraints across a number of commodity markets. And it’s based on the view that investors are going to continue to want to buy commodities. I’ll throw out one factor, one trite fact. There are 13 segments of the US economy. And if you look at those 13 segments, and you look at excess capacity in 12 of those sectors, there is a historically high excess amount of manufacturing capacity.

Norman: Right.

Christian: The one sector that doesn’t have excess capacity is mining. So, as investors look and ask, “Where am I going to put my money?” – and there’s a lot of money sloshing around – they say, “Of the various sectors of the market that I can invest in, the only one that makes sense is mining.”

Norman: Well, there you go. Thirteen is a lucky number, folks, if you want to get into mining. My thanks to Jeffrey Christian, managing director of CPM Group.

Disclosure: No positions