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NOTE: Although
written about a month ago for Metal Augmentor subscribers
(published on November 17, 2009 at 2.17 A.M. EST), the following is arguably
even more relevant today.
Brent Cook wrote an
excellent article last week, Pig Farmers are
Making Brent Nervous. This is a must read and in many ways reinforces the
themes we’ve discussed here for several months now with respect to the
speculative nature of the current rally in commodities, base metals and
precious metals. What makes us nervous more than the excellent points made by
Brent Cook is that he seems to be one of the few to lend a voice to what is
so obviously a disaster in the making.
Yes, we’ve read
the story before that Chinese pig farmers are speculating in copper but we
weren’t aware that Chinese goose farmers are speculating in aluminum! In
other words, there is quite a bit of this story that has received almost no
coverage yet it seems to explain much better the mentality that is currently
driving the gold market than the idea of imminent hyperinflation or the
“dollar carry trade”.
Considering Brent
Cook’s excellent synopsis of a recent Chinese television special on
home-grown speculation, why is a “dollar carry trade” the only
possible explanation for the forth that has built into many asset prices? In
particular, please pay attention to the following excerpt:
·
Because
the interest rate is too low in China. Many farmers could make hundreds of
RMB profits per tonne, with dozens of Rmb per tonne cost of interests. They
use their existing inventories to borrow more from banks. Banks are very
‘happy’ to lend to them. [a
side bar here: China’s 4 trillion stimulus package equals about 15% of
GDP and according to the Financial Times, bank loans are up ~140% this year
to ~8.6 trillion Yuan and official State investment accounts for 88% of GDP
growth. What we are witnessing is Chinese savers experiencing negative
real interest rates in their savings accounts: much worse than in the US. At the same time they are able, in fact motivated, to borrow money at rates that are
less than the inflation rate. Hence, the massive government stimulus combined
with unlimited cheap money has fueled a soaring stock market, real estate
prices, and as presented here, commodity speculation. Approximately 60%
of the stimulus money is estimated to have gone into these speculative
sectors.]
·
·
On
the other hand, many stock brokerage firms in China have become futures
trading companies this year. Stock brokerage firms are very rich of cash.
Private investors plus those brokers have at least invested Rmb20-30 bn in
metal futures market. In 2008, only 50 bn Rmb were in the Shanghai futures
market. This year, the number has increased to 80 bn Rmb. Everyday, he said,
there are more money flowing into the market.
·
Can you imagine if
Citibank or Bank of America were to lend money to Iowa pig farmers so they
can stock up on reels of copper wire? Heck, the banks here won’t even
lend so the pig farmers can buy feed for their pigs! CIT Financial could not
get a measly $3 billion from the banks to essentially save a large swath of Main Street (many small U.S. businesses rely on accounts receivable financing to manufacture
goods or maintain inventory). And yet if we are to believe all the blowhards
and pundits on the Internet, in the media and in Washington DC, it’s
the U.S. banks that are still being reckless with their “dollar carry
trades” and other imagined dastardly acts.
We’re not sure
how the number was derived, but even if much less than “60% of the
[Chinese] stimulus money is estimated to have gone into these speculative
sectors”, that would represent a huge red flag and a high likelihood of
disaster when the stimulus is withdrawn.
Although we are
always collecting new data points, we were already convinced several months
ago that China would be the source of the next global financial crisis. Our
thesis still exists mostly in the form of a sequence of intangibles in our
own minds, but Brent Cook has helped bring our thinking into more precise
focus and perhaps even a distillable form. The bottom line is that if you
insist on casting your investment lot with pig farmers or the hedge fund
manager dolts that Brent Cook describes in his article, that is your choice
and your money. For our own part, we will continue to assess the risks and
rewards of metal investing with as much cold-hearted indifference as we can
muster.
Tom Szabo
Silveraxis.com
Also by Tom
Szabo
Tom Szabo introduces The Metal Augmentor, which will be the detailed coverage of mining equities from junior
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