The Road to Nowhere

To the surprise of everyone, but us, China’s economic data has not been accurate.  We have repeatedly stated never believe in Chinese figures.  Generally, there are three sets of financial books; one for the government, one for Wall Street, and the real books are for management.

The boom in commodities was in large part due to China importing large quantities to stockpile for future use and to build infrastructure and cities.  Some of the cities built over the past 15 years remain pretty much empty today ( https://www.youtube.com/watch?v=0uxv5_GoY80 ).  Similar to Japan during the 1990’s, they built roads that led nowhere.  During July, the so called experts were telling us the Chinese economy was on the way up because they were big buyers of copper and oil.  The truth is China is taking advantage of low prices and is buying to stockpile.

Contributing to their exceptional growth over the past decade was the West going on a debt fueled spending spree.  Thanks to record high debt levels among the rich nations, the demand for Chinese goods will not exceed the levels of the past for years.  That does not mean the Chinese economy is toast though.  It will still bounce along because there are over a billion people that must be fed, clothed and sheltered. We often forget that the average Chinese income is roughly $5,500 (2013), and hardly an amount to put the world economy into overdrive.  

One of the biggest reasons why all stock markets are going nowhere is due to zero interest rates.  Rather than providing stimulus, they are slowly destroying the world economy by shrinking savings. After taxes and inflation the risk-free rate earns a negative rate of return on the cash (purchasing power is falling).  This is now affecting real estate because people must wait longer to save for a down payment.  This is why today all real estate prices in almost every corner of the globe has peaked or are falling. 

Two Indexes that are telling us the global economy is slowing are the Baltic Dry Index and the CRB Index (commodities).  The Baltic Dry Index measures the price of shipping dry goods index.  While the index is up 15% this year, it still remains down 44.7% from 2 years ago.  The 15% increase this year is more of a sign the world economy is bouncing along.  It signals that we are in a slow down, but nothing serious.

The other metric we use is the CRB Index.  Only three times, since being created in 1976, has the CRB index gone under 185.   Last month marks the fourth.  The index peaked on July 2^nd, 2008 at 473.52.  The number to watch, which initially was hit on Oct. 25, 2001 is 181.94, the all-time low.  Two consecutive days under this number will mean the world economy is contracting and the risk of recession increases dramatically.  It is also telling us that deflation is gaining strength.

With the index bouncing around the 190 area today it is telling us stock markets will be flat to slightly down.  However, based on today’s earnings and dividend yields, stock markets are trading at their long term norms. 

Our recommendation is be careful in investing and avoid taking on debt.  Invest in companies that have a strong dividend record.  Watch the Baltic Dry Index  and the CRB index to see how the stock markets will be acting. Cash is becoming the best asset to hold.