The most important news of the day for resource speculators isn’t getting much attention. Fluctuations in the price of gold, Trump’s Fed nominee saying interest rates should be cut, and the global economic slowdown dominate the headlines.
That’s understandable, but for us, the big driver is usually China. And China Beige Book just reported that China has opened the credit spigots to stimulate its economy—big time.
Now, to be fair, this is not an official Chinese government report. It’s the result of a survey of some 3,300 Chinese executives. That’s enough people to provide intersubjective credibility. But it’s also subject to prevailing sentiment and perception biases. On the other hand, it’s independent, and no one really believes official Chinese numbers anyway.
So, while taking China Beige Book’s report with a grain of salt, I do think it’s an important early signal that things could be about to change for industrial commodities.
If China succeeds in stimulating its economy to higher growth rates, the 800-pound gorilla of industrial production will start gobbling up resources at a faster pace again.
That would stimulate economies that feed resources to China, which could in turn help improve the outlook for the entire global economy.
But wouldn’t creating a credit bubble in China be dangerous and shortsighted?
Maybe. But if the Chinese economy rebounds, that would take the pressure off Chinese negotiators while they wrangle with their US counterparts in the trade war. China just might be willing to do something risky in the near term if it secures a better end to the trade war, which would have long-term benefits.
I don’t pretend to know how all this will play out.
If things take a turn for the worse in Europe and the US, it may not matter what China does. Remember the US yield curve inversion. If China’s biggest trading partners go down, they go down. And so do industrial minerals.
So I would not take China Beige Book’s report as an all-clear signal for resource investors. I’m definitely not piling into industrial metals, even ones I like a lot, like copper, as discussed yesterday. But I do think it’s important to watch this space. If China Beige Book is right, next quarter could be a major turning point for the resource sector.
Why not get in early, while so many great plays are on sale at stupid cheap prices?
Because there’s still a lot of risk.
I’m perfectly happy to miss out on early gains. I’d rather bet on a solid trend clearly in motion—after the greatest risk of downturn is behind us.
If China leads the way to a global reflationary cycle, there will be years to profit.
Wednesday, March 27, 5:57pm, EDT, 2019