Recently we cant watch a big divergence between raw material prices and the movements of the stock market. The question is witch market is right about the situation?
1.) Why did the raw material market did have this huge decline?
If one believes the press the main reason seams to be the bad economic situation in china. But maybe especially the drop of the oil price has big time supply reasons. But why then have the ore price - this market is to 70% chinas demand - did fall so deep. All raw material price in witch china has big stakes in demand did fall over the last 3 year. Hard to believe that this is random or special situation. And why do economic indicators likethe purchasing managers index fall under 50 into recession mode while official statistic tells us there has been 6,9% growth last year. There must be somthing terribly wrong in china´s economy. In official statictic there might be some cultural lying to calm down the people. A lot of bad news is going to come if this is the case. There is a joke that a chinese buisiness man has three books. One book for tax paying, one book for his wife and one book for his mistress.
--> it doesnt seem that the raw material prices are totally wrong, there are fundamental reasons for the low prices
2.) What is the reason of chinas slow growing or recession?
Living in a economy with highly free markets on shoudnt forget how hard central planning governments can fail. The DDR in eastern germany has been a great example how great a missallocation of ressorces can be. Chinas strategy has been to invest a lot in some central planned industries and make them big and competive. They are more regarded for good and cheap copying than innovations. While pushing some industries they seem to have overinvested exspecially in the steal and real estate sector. People are talking about dead cities and overcapazities. The central plan has failled. In a free economy capazities are normaly expected to skrink fast, and things will recover. I guess this will not happen in chinas central planned economie. Skrinking is politically to hard to do. So overcapacities will stay, hoping demand will outgrow sometime the overcapacities.
--> the cyclical problem in china is transferred into a mid/long term problem, bad ressource allocations are not going to be corrected fast enough
3.) Why did the stock market didnt follow for so long?
Stocks are valued in theory with a discounted cashflow model. The mental focus of the stock marked has recently been the denominator of the formular. The counter did not play that important role in valueing the whole market. The situation in china has been ignored for too long and know the market is waking up and realising that there is not that mutch cashflow as suggested. If the counter is zero the denominator is irrelevant. Even if thats polemic - in my view the bear market has just begun and there is some way to go.
--> the stock market was too long focussed on low interest rates only
4.) Which assets are overvalued?
Assets of investment goods witch sell production maschines are probably more often overvalued and often value traps. The investor looks at the historical figures, but what he sees is (a bit exagerated) a golden 20´s past going into a beginning 30´s depression.
It can also still at oil prices about 30$ be dangerous to pick some oil stocks witch look cheap in historical figure. Actual prices are so mutch lower than the average price last year, that the fixed cost in place can hurt a lot for the expected earning next year, when you calculate oil prices staying flat. Extrapolation is very dangerous here.
5.) Which are the assets to buy?
The market is bashing luxury stocks quiet hard. I dont believe that this is rational. In recessions the demand for luxury shoudnt be that bad because it comes from people witch are already wealthy and not that mutch price sensible even in a recession. There are some special effects involved with more corruption controls in china but this shoudnt effect that general view too mutch. A lot of luxury stocks have good brands and are quit profitable, so i guess its the right place to watch for some cheap and good quality investments.
In the raw material market their might be some value opportunities to, witch might have have good fixed contracts like Cheniere Energy or are operating in some niche and are just declining with the crowd.
I guess long term US bonds could work out very well as investment in this environment. In europe and japan the interest rates are practically zero. Raw material countries like australia dont seem save today and gold in a deflationary environment is also not that great. So where to go when you need a save haven and still want to get interest rates? There are practically only long term US bonds to find real diversification in a downside scenario.