Commodities: A Canary in the Coal Mine
I do not buy into the doomsday scenario outlined by some that commodity prices will be gutted in the next few years by the China slowdown. But it’s impossible to ignore how commodity prices have dropped substantially from peaks a year or two ago.
Consider the collapse in coal stocks, or the rollback in base metal prices like copper and aluminum since peaking in summer of 2011. Even oil hasn’t been able to break through $100 for long in the last year or two. Global markets are complicated, but China is the world’s biggest manufacturing market, and its hunger for energy is unmatched.
The softness in commodity prices says a lot about softness in China.
Commodity traders know this. China expert Michael Pettis posted a recent article on his blog China Financial Markets predicting a further collapse in commodities through 2015. In it, he writes that “almost all the increase in demand in the past twenty years, which in practice occurred mostly in the past decade, can be explained as the consequence of the incredibly unbalanced growth process in China.”
In short, he’s bearish on commodities in large part because China is slowing down — but also because its economic makeup is changing.
China Stocks Still Slumping
This one is obvious. The iShares FTSE/Xinhua China 25 Index ETF (NYSE:FXI), a clear proxy for China large caps, is down 5% in the past 12 months vs. a 20% rally for the S&P 500. Among those big names in the red include Internet search giant Baidu (NASDAQ:BIDU), down 23% in the last year, and major telecom China Unicom (NYSE:CHU), down 22%.
And as I outlined in a recap of the best global markets of the last year or two (surprise, America is No. 1!), China has significantly underperformed when you compare the Shanghai composite with other major exchanges around the world — including London and Tokyo.
The crash has already happened in Chinese equities. So the only question is whether the pain in the aforementioned areas will continue, or if there’s a turnaround in the near future.
Considering that most China stocks remain pointing downward, it appears investors haven’t seen enough to get bullish on the region just yet. You might argue that means you can get in now and be first … but just remember the risk of doing that, especially while U.S. equity markets are soaring in 2012.
Warning Signs Are Prohibited. Move Along.
I’m gonna steal this from Josh Brown at TheReformedBroker.com because it’s too good and too spot-on to bother recasting (emphasis his):
“China is a very different animal, a lie wrapped in a deception cloaked in a propaganda program dragged by an idle cement mixer. There is no roadmap, there is no precedence and there are no rules. (Each) ongoing datapoint has the government’s fingerprints all over it before we get to see it. Economic targets issued by Beijing are treated as though they are actually orders by the millions of government officials in charge carrying them out.”
In short, who the hell knows what’s really going on in China?
Given that, it’s awfully hard to start looking for signs of a bottom because Beijing will always spin the news and the numbers to put the best face on a bad situation.
Bottom line: Don’t buy a bottom in China yet.
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.