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Monday, February 9, 2009

China, Commodities, Baltic Dry: Pop, then Drop

“The worst cannot be ruled out. There’s a lot of downside risk.” -Dominique Strauss-Kahn, IMF Managing Director

The recent bounce in the Baltic Dry Index (BDI) was inspired by a drawdown in iron supplies in China. These supplies needed to be replenished. That's it.

No, there is no economic recovery in China. Growth rates are still in free fall. This is nothing but a bounce, that coincidently takes the BDI back to 2003 levels. These are hardly bargain prices.

Despite the bounce in the BDI and a resurgence of chatter over the "reflation trade", the Commodity index (CRB) rallied a mere 1.81% last week. To put things in perspective, CRB is now at the 2001 high. The index actually lost 23% within a year, falling to 181.83 as the bursting Tech Bubble sucked the US economy into a recession.

With the IMF now saying that advanced economies are already in a DEPRESSION, what do you suppose the odds are of the 2001 low of 181.83 holding? Contrary to the desperate beliefs of the tin foil hat crowd, deflation is here... and commodities will get smashed further as debt continues to get destroyed in truly epic proportions.

The CBOE China Index (CYX) rallied 7.54% last week and has now put in a higher weekly low at 284.59 for the first time off the panic low of 251.65. However, until the previous weekly swing high of 381.68 is pierced, the trend is still DOWN.

The best case scenario I can envision consists of several years of range bound "base building" in the low 200 to high 300 area.

However, the most probable outcome is not the best case scenario, but rather another violent leg down as the export economy of China implodes further still.

No amount of government stimulus such as infrastructure projects can successfully absorb and productively re-deploy the massive number of workers being suddenly shed from the labor intensive manufacturing export sector that China specialized in.

IMF Says Advanced Economies Already in Depression (Update1): " Advanced economies are already in a "depression" and the financial crisis may deepen unless the banking system is fixed, International Monetary Fund Managing Director Dominique Strauss-Kahn said.

“The worst cannot be ruled out,” Strauss-Kahn said in Kuala Lumpur, where he was attending a gathering of central bankers from Southeast Asia. “There’s a lot of downside risk.”

Ten days ago, the IMF cut its world-growth estimate for this year to 0.5 percent, the weakest pace since World War II. Stimulus packages alone won’t succeed in dragging the global economy out of recession unless confidence is restored in the banking system, Strauss-Kahn said today.

“All this will work if, and only if, the different countries are likely to do what they have to do in terms of restructuring the banking sector,” he said. “And today it’s not done.”

The U.S. economy has lost 3.57 million jobs since a recession started in December 2007, its biggest employment slump of any economic contraction in the postwar period as companies from Macy’s Inc. to Caterpillar Inc. cut costs. The U.K. economy will shrink this year by the most since 1946, the IMF forecasts.

“There is hope that the fiscal and monetary stimulus measures being implemented around the world can help turn things around,” said David Cohen, Singapore-based director of Asian economic forecasting at Action Economics. “But there is still the risk it can be short-circuited by further financial turmoil.” "


Anonymous said...

Ben again you say, "tin foil hat crowd". You have always used that phrase in the context of goldbugs. Though this time I noticed you didn't mention the word "gold" !
However gold is not a commodity as such because it does not get consumed, although it has been relegated to commodity status by government decree. It is money, is and always has been. Governments in the end cannot dictate what is money. The market will do that eventually. Every fiat experiment has lasted 40-50 years and time is nearly up for this one.
Another NOT well known fact is that gold performs POORLY in inflations and BEST in deflations ! Most pundits don't get it ! The spike in 1979 was an aberration resulting from the activities of the London Gold Pool and Nixon/Volker going off the gold standard in 1971. Now everybody says you need inflation for gold to do well. Wrong. And I am quite sure the Fed etc are happy for this falsity to be general opinion ! It helps their gold price suppression scheme. This, written in 2005, explains this.
Here is a link to a bunch of charts.
You dont need to read the article, just look at the intraday charts half way down. What market in the world behaves like that ??!!!
Also the essays written over the years on
The problem is that in order to suppress the gold price you eventually run out of gold ! That is about now due.
Gold is going to be a monster bull market. The UD dollar will end up as toilet paper.
As you know, I always read your blogs, and have done well out of them !

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