China and Commodities Lead the Global Financial Meltdown , by Al Martin

New Improved
Second Edition

The Conspirators:
Secrets of an Iran Contra Insider
by Al Martin
Just $19.95

Order Form Here

or Call toll Free
1-866-317-1390

by Al Martin

China and Commodities Lead the Global Financial Meltdown

(8-25-15) As we have been consistently writing about the dark clouds gathering on the planet’s economic horizon, this latest downward trend is connected. Now China is the precipitating catalyst in the commodities as it has been all along since it has become the largest user of commodities on the planet, specifically copper, iron, nickel steel, and aluminum. China is the largest user of base metals on the planet, so with China’s economy deteriorating, this will be throwing a monkey wrench into the industrial metals, minerals and oil market – and it has. That monkey wrench phenomenon is spreading.

Once the monkey wrench was thrown, what was it going to affect? It would affect the other so-called emerging markets and that’s what it has done. It has affected emerging markets’ stock markets in the last 3 weeks. They’ve all been hit and some have even returned to 2009 lows, particularly Brazil, India and Russia. The so-called BRIC countries are getting hit. They are leading the decline as they should since their economies are the most industrialized and the greatest producers of industrial commodities. As their economic growth declines, the demand for industrial commodities also declines at the same time that the supply of industrial commodities on the planet continues to increase.

Meanwhile Glencore, one of the world’s biggest commodity traders, lost 66% of its value based on the fall in the stock price. The problem is that when the planet’s economy began to bottom out as it were in the spring of 2010, people got fooled that a first and hard bottom had occurred – but it hadn’t. Speculative excesses with the collapse of the 2007 bubble were still a long way from being worked out. Industrial corporations mining in particular expanded production when these speculative excesses had not been worked out and there were still surpluses in industrial metals and minerals relative to demand.

There is a tremendous lag time in the metals and mineral business. For example to get a new copper mine open from the start until it produces takes 10 years. Thus companies that are in the industrial metals business – metals minerals oil, etc – have to make forecasts – and these guesses are not easy to make.

What everyone had forecast was that the central banks had their arms around the problem to the extent that they could reliquify the planet’s economy that global GDP could return to a more normal 2 to 2-1/2 % growth rate. And that has not happened.

In 2013 Glencore merged with mining company Xstrata which was an Australian deal since Australia is the largest producer of iron ore on the planet. Everyone in Australia that produces iron ore got fooled by the back up in prices in 2010 and 2011 when iron ore backed up from $55 a ton. The long and short of it is that everybody in 2010 and 2011 miscalculated. They began mergers, consolidations, expanded production, etc. at a time when the speculative excesses that had been built up in the global economy before the 2007 break had yet to be worked out.

There’s an old Republican adage – and the Republicans are right in this regard – and this is the principal difference between Republicans and Democrats. Republican believe that it’s best to let speculative excesses get worked out naturally as opposed to having central bank intervention provide artificial liquidity – which is the Democratic point of view. This is one of the great divisions that exist between Republicans and Democrats

Thus we have the idea of allowing the marketplace to dictate price action and to weed out speculative bubbles versus the idea of providing artificial support for the markets in order to “soften the blow.”

The natural reaction to falling commodity prices is that countries which produce this will try to cheapen their own currency. This has happened already as China has devalued the yuan – and more recently Kazakhstan, whose currency lost a quarter of its value, as well as Vietnam. They have done this to remain competitive in a falling price environment.

The so-called emerging market commodity countries are simply a euphemism for beat-out third-world nation-states. The commodity-rich-all-beat-out countries are now in a race to cheapen their currency because it’s the only way they have to remain competitive in a falling price environment.

As Zero Hedge points out, “the Glencores… of the world… may indeed be quietly liquidating billions in paper commodity exposure.” Since Glencore et al became the largest suppliers to the ETFs (Exchange Traded Funds) and the ETNs (Exchange Traded Notes, when that demand began to dissipate, the positions that they had on themselves they began to get out of. That’s why liquidity shrank.

The global shrinkage in liquidity is not only a bond market problem or a commodity market problem. There’s only so much you can do with these falling prices and there’s only so much you can do by cheapening your currency.

Cheapening your currency is one of the most immediate ways of countering lower commodity prices in an effort to keep your own industries profitable. If the items they are producing are falling in value, how do you keep them profitable? By cheapening the value of your currency.

So what does the future portend? Now we are to the point that the central banks are about reaching their limit in terms of quantitative easing and fiscal stimulus, you see now all central banks are easing their interest rates, even as Federal Reserve Governor Janet Yellen and the Fed are out of step with this. Now global interest rates which are low are going to get even lower on a “real basis” meaning after inflation. We see that the problem which Yellen finally admitted that the Fed has miscalculated inflation and that global inflation continues to fall.

They were basing this concept on raising interest rates in a rate rising cycle at the short end on this idea that deflation would finally begin to pick up – and it hasn’t.

Now the Fed is so desperate to “normalize” monetary policy that they’re tripping all over themselves looking for a reason to raise rates – when there are none.

Another thing holding the Fed back is that the markets would react negatively to any increase in interest rates – even though it’s meaningless. Because all the Fed can do is affect the short end of the yield curve when the real demand for money is at the long end.

Thus the Fed will create what’s called a “yield inversion” which they’ve done before when they’ve made a mistake – and that they’re about to make – when they force up short term rates and force down long term rates. When they do this so-called yield inversion, the Fed will have made a mistake.

So is this succession of “mistakes” a series of accidents (non-intentional) or a conspiracy (intentional)? It’s largely incompetence and wishful thinking. This is the same problem central banks have always had. The central banks are a relatively new phenomenon. You don’t see a lot of financial historians within the ranks of central bankers and that’s too bad because in the 1920s and 1930s you did and now you don’t. So central banks don’t take a look at what has happened in the global economy in the last century. They don’t look back that far and they simply can’t get their minds around the idea that the planet’s economy can deflate – for decades at a time. That has not been unusual for the planet’s economy in the past to deflate for 30 years at the time.

In conclusion the Fed would only exacerbate a problem by raising rates now and that’s why I don’t think they will. They know they would only make the problems worse. However if they do, you’ve got to short everything because the markets are not going to react well to it. And the central banks have reached their limit in terms of the monetary stimulus that they can provide through lower interest rates.

The best and most efficient way for a government to provide fiscal stimulus is to lower taxation -- but lowering taxation is an anathema to the so-called policy-makers. That’s the only true method of dealing with this problem…

* AL MARTIN is an independent economic-political analyst with 25 years of experience as a trader on NYMEX, CME, CBOT and CFTC. As a former contributor to the Presidential Council of Economic Advisors, Al Martin is considered to be a source of independent analysis for financially sophisticated and market savvy investors.

After working as a broker on Wall Street, Al Martin was involved in the so-called "Iran Contra" Affair as a fundraiser for the Bush Cabal from the covert side of government aka the US Shadow Government.

His memoir, "The Conspirators: Secrets of an Iran Contra Insider," (http://www.almartinraw.com) provides an unprecedented look at the frauds of the Bush Cabal during the Iran Contra era. His weekly column, "Behind the Scenes in the Beltway," is published weekly on Al Martin Raw.com, which also publishes a bimonthly newsletter called "Whistleblower Gazette."

Al Martin's new website "Insider Intelligence" (http://www.insiderintelligence.com) will provide a long term macro-view of world markets and how they are affected by backroom realpolitik.

Home