Tom Szabo

The Bear Reaches Out for Commodities

Dux, I refer to the global business cycle, which is very real and has not been vanquished. Think-About-It, the standard of living for the average Chinese cannot equal or pass our current level due to a number of preventive factors. A clumsy way of summarizing these would be to say China simply has too many people, but I'll try to add in some nuance. (1) China's one child policy has created incredible demographic headwinds that will become very fierce in the years ahead. Basically, the population is aging at such a rapid rate that the majority of consumer income will be spent supporting the hundreds of millions of elderly. You think the $50 trillion social security liability facing the U.S. is a big deal? China's problem is an order of magnitude larger, and not only is it off-balance sheet but it isn't even acknowledged. (2) The Chinese economic miracle has failed to reckon with the environmental, social, health, safety, social and other costs attendant to industrialization. These all have to be factored into standard of living, and when you do that, the Chinese are actually further behind then raw per capita income or GDP figures would suggest. (3) Absent weird science, there will never be enough energy or beef (just 2 examples) produced on Earth to satisfy Chinese consumption were it to equal the current level enjoyed in the U.S. (4) Chinese growth has been accompanied by gross misallocations of capital. A large portion of the nation's wealth has been squandered on "investments" with zero merit. We too overbuilt in New York, California and Miami, but that excess will eventually be absorbed by domestic dreamers, immigrants, or foreign bargain hunters. But how many people are going to buy that empty, crumbling office building or shopping center in a Beijing or Shanghai suburb? I'd say it's about par with Detroit. And as nuts as the building craze got in the U.S. over the past few years, we weren't doing a lot of building in Detroit. This will haunt the domestic Chinese economy for decades. (5) Political change in China will be required at some point for advancement past a certain "achievement plateau" that looms in the not-to-distant future. The struggle for control of the government will likely create major upheavals that will periodically stall economic progress. The Chinese have set up a system with zero flexibility. That's okay if you're a Communist, but dangerous when you are a Capitalist.

The Bear Reaches Out for Commodities

Everyone in China, India and other emerging economies will never have the current standard of living as the U.S, etc. The numbers simply make it impossible. Perhaps OECD living standards will decline and meet the emerging economy standards in the middle sometime in the distant future. No matter, the commodity cycle will continue to exist and it isn't based on "profit-taking, bargain-shopping, and silly panic" but rather on the very real business cycle that impacts supply and demand. Simply put, we may have entered that part of the commodity cycle where supply balances or exceeds demand. This is a temporary condition, a small cycle within a larger cycle if you will.

That larger cycle is what's really important and often gets missed. Probably because it is so large, spanning centuries as it does. I'm not talking about Elliott Waves, Kondriateff theory or anything like that. Rather, what I'm talking about is a mega-shift in the entire global system where commodity prices are in the midst of reversing their centuries long decline (driven by technological improvements that increased yield, access and efficiency) and starting a climb that may last centuries as well. If not centuries, at least until nanotechnology or some science we haven't event dreamed of will allow humankind to cheaply manipulate matter at the elemental level and thus create unlimited supplies of just about any material.