Impulse Rally in Commodities Running on Fumes
At the start of 2016 it was deflation all over again. Then suddenly commodities take off and the global economy heats up. Three possible explanations are:
1. The depression is finally ending
2. The smart money knew Trump would win
3. China flooded its economy with cheap money
With respect to 1, Jeffrey Snider keeps pointing out nothing has changed. As for 2, that’s just coincidence. The evidence for 3 is strong. The history of the post-2008 economy is slow credit creation, slow economic growth. Dollars are in high demand. China can break out for a time, but then devaluation pressure and inflation become a problem. It tightens. The global economy sinks back towards a deflationary crisis. China pumps.
Here’s Chinese PPI through December 2016. Notice the PPI didn’t start rising consistently until July 2016, many months after the initial credit surge and several months after commodity prices started soaring.
I thought this impulse would lose steam in the middle of 2017, but it moved into what looks like a blow-off top this autumn. Chinese PPI growth will cool substantially into 2018 and should turn negative again month-to-month assuming the current credit trends persist.
I’m not sure the rally is totally over in the sense of top ticking the price, but today’s action in China suggests the smart money knows the party is over. Credit growth indicates the end of the party.
Why does it matter?
Because much of the boost in GDP growth over the past 18 months can be sourced to China’s credit boom.
Message 1: The 2017 global growth acceleration was largely (70%) a commodity bounce. This applies even to the US which was 20% of the global growth improvement but, as the 1st chart below shows, it was entirely energy investment. Once you strip that out ‘underlying’ growth is only 1% or so (ex inventories) – the slowest since 2010 – and a significant amount of rotation now needs to take place from energy to non-energy investment just to sustain the current growth pace.
The slowdown cometh.