Every now and then I stumble across a new source of information that I can’t wait to share with my readers. Today is one of those days. If you have even the tiniest shred of interest in commodities, then head over to the Goerhring & Rozencwajg website immediately. It’s just terrific stuff.
I must admit to being partial to their bullish commodity story, but in a recent RealVision TV interview, Leigh Goehring solved a problem that I have wrestled with for some time.
We all know the China bear story.
For the past couple of years, famed China skeptics like Jim Chanos (FT Article - “China:market bulls beat the short sellers - for now”) and Kyle Bass (Reuters Article - “China credit bubble ‘metastasizing’”) have been warning about a China credit bubble implosion. Although I am hopeful that China will avoid the apocalyptic scenario they paint, there is a little part of me that worries when I am betting against Chanos.
Chanos might have lost the Tom Selleck mustache (and in the process, given away a fair amount of his hipster cred), but I hate being on the other side of his trade. I am pretty sure God has an account at Kynikos Accociates. They are simply that good.
So I have always struggled with being long commodities in the face of a potential China credit implosion. After all, China is the world’s largest importer and user of commodities, a slowdown would be catastrophic for commodities, right?
Not so fast. As Leigh Goehring so aptly notes, a great analogy for a potential China credit crisis would be the Japanese credit collapse of 1990.
There can be no denying that in the wake of the Japanese bubble bursting, their economy suffered a credit contraction that rivals the world’s greatest slowdowns. Given this horrible setback, it would be logical to conclude that Japan’s commodity usage suffered a similar contraction.
Yet, the data does not square with what would seem self-evident.
Have a look at Japanese oil consumption in the years following the bursting of their bubble.
Not only did oil consumption not decline, it actually increased and did not fall below the 1990 level until 2000.
Japanese copper usage is not quite as dramatic, but after an initial fall in 1991, it also did not decline as much would be expected given the collapse of the Japanese financial markets.
Leigh Goehring does a better job articulating this development, so here’s a quote from his RealVision TV interview:
I did find it fascinating, that for some strange reason, Japanese commodity consumption didn’t roll over until eight or nine years after the bubble broke in 1990. So you could say that China could have a big financial trouble, and still its copper and oil consumption could still creep up.
…if you take the Japanese experience, and the Japanese bubble broke in say ‘89 or ‘90, many commodities continued to go up for the following seven to eight years before they eventually rolled over big time.
Leigh has many more arguments of why he is bullish on commodities, so don’t mistake this sole point as the primary justification for this beliefs. I was simply fascinated with this phenomenon. I would have never guessed that Japan’s commodity usage held up so strongly following the bursting of their financial bubble.
As I mentioned, I am far from a China bear, but I do acknowledge the risk of a financial crisis. Chinese debt growth has been breathtaking. At some point, they will have a credit cycle downturn that causes problems. Yet, it might be wrong to assume that shorting commodities would be the best way to express that view. In fact, it might be just the opposite…
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