The interview starts off with a very weak idea "fundamentals have been thrown out the window". However the analysis gets much better as the video progresses. Here are a few key ideas from Todd Martin.
- RMB offshore vs. onshore rate is at a historic low. This shows Hong Kong or China mainlanders are hoarding cash, possibly to repay debts.
- The liquidation phase is concerning. Markets are looking into a deflationary abyss.
- Recent capital inflows into China are misleading. It was not investment but rather mainland money repatriated to repay debt.
- Cash crunch in China picks up momentum. We are going into a new down phase and true credit cycle in China. That can take on a life of its own.
Rishaad Salamat: "Are you saying at the moment that the Chinese economy is teetering on the edge as a consequence of all this?"
Todd Martin: "It's beginning to look like that. There are signals that there is a cash crunch and it is picking up momentum. The offshore RMB market for one. The repatriation of capital for two. This could cascade into a property correction. Once that gets going, you could probably get a lot of sellers jumping into the market."
Rishaad Salamat: Is commodities the worst asset class to be in, at the moment?
Todd Martin: "Commodities is probability the worst asset class to get hit. If you are in a business seeing input prices fall and you have some pricing power downstream, then you could come out OK. Steel prices are still falling faster than iron ore, so that is still not one to be in yet. It's pretty bloody. We are withing 15% of the bottom but the credit cycle concerns me."
I disagree with Martin about the fundamentals. I think fundamentals on China are horrible. I have been bearish on commodities because China is overheating at a time global demand from Europe and the US will collapse.
For further discussion, please see Michael Pettis: Long-Term Outlook for China, Europe, and the World; 12 Global Predictions written August 22.
Hopping into commodities or commodity-related currencies with a strengthening US dollar, falling global demand, a potential breakup of the Eurozone, a default by Greece, etc, was a poor investment idea.
Please see the link for a very nice discussion of 12 detailed ideas for the global economy.
This is what I said on August 22, in response to the ideas of Pettis.
Six Key IdeasChina did not decouple in 2008 (except perhaps in reverse), and it will not be immune from this global slowdown either.
- China Will Slow Much More than China Bulls and Commodity Bulls Think
- Non-food Commodities Take Big Hit
- Eurozone Experiment Ends in Breakup
- US Protectionism Takes Hold
- Deficit Countries Control Demand, Thus Have the Best Cards
- Disaster Hits BRICs
Except perhaps for points three and four (and perhaps for all six points) investors and analysts have taken the opposite view. Most are looking to buy the dip, invest in commodities, invest in commodity producing currencies, and invest in the BRICs.
We did not have commodity producer decoupling in 2008 and there is no reason to expect it as debt-deflation plays out and China abandons its reckless investments in infrastructure.
I suspect China slows sooner than Pettis thinks, but no sooner than the next regime change in China. Markets, however, may react well in advance.
Global Deflationary Outlook
Pettis does not use the word "deflation" in his writeup, but he describes a very deflationary global outlook complete with protectionism, beggar-thy-neighbor policies, currency wars, and falling non-food commodity prices.
Pettis did not discuss energy, but the forces are clear: peak oil. vs. global slowdown. Given peak oil and the possibility of war over it, energy is a wildcard.
Mike "Mish" Shedlock
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