Juggling Dynamite

I recently did an interview with Metals News on key relationships in the commodity, equity and currency markets. You can view the article here.

The discussion makes a few key points.
First, guys at perpetually long equity firms (the vast majority of commentators) are constantly married to an optimistic hope for the stock market. No one should ever be mislead or encouraged by their bullish take; they can only sing the one tune.
Second, we are not in a typical post-war recession cycle, we have not been for 10 years. Analysts that keep tossing out comparisons to the last two recessions are not useful. We are perhaps just half way through a deleveraging cycle that will continue to suppress credit, growth, earnings and stock prices over the next 5-10 years. On top of that real estate is also in the midst of a secular down trend where we will move from the present over-supply to a market of tight supply eventually over the next few years. Boomers are in the process of realizing that they own too much house and too little cash and savings. Interest rates have been reduced in efforts to rescue debtors but in the process this has thrown savers into a dire need for more capital to produce subsistence income.
As the penny drops for boomers, one by one, their rational response is to look to reduce their stock and real estate holdings. The challenge is that the population behind the boomers is much smaller, poorer and more pessimistic. They are not feeling confident, wealthy or self-indulgent enough to snap up highly priced assets. Prices will need to work down and population will need to expand to soak up the supply. This will take years not months. Dealing with the facts at hand and calibrating our approach to the conditions in which we exist is the only response that makes any sense. Trying to drive on with an idea of how conditions used to be (when we were in the secular leveraging period) is akin to financial suicide.

A great piece on China this morning from copper market analyst Simon Hunt courtesy of John Mauldin's Thoughts from the Frontline. The article is worth reading and cites some sobering stats on demographic and resource hurdles (especially water) facing the country.
Rarely have I heard market hyperbole and salesmanship more fully in bloom than on the topic of China the past few years. Many people have had a vested interest in selling the “insatiable growth” story and so we have heard plenty of it. Hunt's latest report confirms that China has now entered into a period of significant trial and tribulation. Domestically he cites the following list of issues now threatening political and social stability:

• Home affordability
• Leadership instability
• A potential if not actual housing bubble
• The rising income and wealth differential between those who have made it and those who have not
• The country’s continued dependence on exports as its principal driver of growth
• Cheap credit, which punishes savings and encourages investment/speculation
• The misallocation of capital that springs from the previous factor
• Local/provincial government indebtedness
• A new assertiveness and arrogance at all levels
• Policy making that focuses on short-termism without addressing structural and longer-term issues, etc.
• Impact of rising wages
• Energy intensity
• Role of foreign companies
• Resource dependability – water, raw materials, etc.

This list reads of course, like a hit list of the classic human behaviour that has plagued not just China, but the entire developed and developing world the past decade.
Ultimately I suspect a revolution of the Chinese people will be needed to redress incredible systemic imbalances and realign the interests of the elite few with the needs of the many. And in the western world, what will our revolution look like?
For starters individuals are gradually pulling off the energy-sucking credit machine which has crippled our society for many years now. Increasingly families are cutting the money-changers out of their monthly cash flow by paying off debt and spending less. I am reminded of the scene in the first Matrix movie, where we are shown the web of human pods being used as batteries to feed the machines that have enslaved them. As each person comes to consciousness and sees the world as it really is they tear off the attachments that have been draining their energy and set forth on their own power.
The annual income of the bottom 90 per cent of US families has only grown 10 per cent in real terms over the past 37 years. That means that since 1973 most Americans have been increasingly dependent on credit—apparent rather than true wealth—to keep the American dream alive. Meanwhile, the incomes of the top 1 per cent have quietly tripled. In 1973, chief executives were on average paid 26 times the median income, now they are siphoning out more than 300 times the average person's income. Greed and misallocation of resources have bankrupted our families and are now bankrupting our companies and our nations. And our governments continue to aid and abet this by trying to restore a now antiquated status quo.
Regular people have been complacent in all this and much too easily anaesthetized by things (cheap imports from China). But one by one, individuals are coming to consciousness. This is a healthy and crucial step, but as one who has been wide awake on these issues for many years now, I feel compelled to caution newcomers as to the magnitude of the issues. Staggering funding deficits are systemic on pretty much every level today all around the globe. Individually and collectively we are much “poorer (and fatter!) than we think”.
It will be a lengthy journey back to health. But awareness is the first step. It is much better for society as a whole when individuals are enlightened and steadily working their way back to sustainable health rather than repeatedly blind-sided and victimized by ignorance and naive trust in ‘advisors’ and ‘leaders’ that never were looking out for our best interests. Their is strength in humble, honest, truth and individual discipline. Now we can find it.