What is going to happen next?
We told you in 2021 that commodity prices would boom in 2022. And they did. That was one of the main reasons we predicted inflation would boom as well. Both predictions were outliers. Well, I've made a career being an outlier! Inflation moderated this year mainly because the price of gasoline and motor vehicles declined from their highs and food and other energy were stable thus making yearly comparisons be benign. Stick items, such as rents and wages are still rising but the decline in gasoline and motor vehicles has covered those hikes so headline CPI is declining. All that is about to end. The chart above shows the rebound in China since the end of the zero Covid policy. A resumption of the Chinese economy will have these effects: - Greater demand for raw materials
- Resumption of manufacturing at the previous higher rate
- Stockpiling from Chinese government
I think it is obvious that China will demand more raw materials to feed the maw of their manufacturers. Manufacturers are now opening and bringing people back to work. The chart shows car traffic which is a good proxy for the state of the economy particularly the activities of people going to work and shopping. It also means that there is a tremendous amount of pentup demand for Chinese to go shopping! Look at the pentup demand from the end of Covid restrictions in the US and you can imagine the pentup demand from a Zero Covid policy! Way more demand! So Chinese consumers will also demand more goods and services, thus stimulating global demand for commodities and also manufactured goods. That demand will boost raw material prices. | |
The Chinese government is now starting to stockpile strategic goods such as: They saw what happened to Russia after the invasion of Ukraine and they don't want the same thing to happen to them. You have to realize that China, the second biggest country in the world, demands a lot of these commodities when they demand them. They don't just buy a little. (Why are they worried about getting sanctioned? Taiwan invasion coming?) The bottom line is this. We are at the beginning of a new commodity bull market. I don't want to say boom yet but a regular bull market for sure. That will put upside pressure on inflation again. That will lead the Fed to continue raising interest rates longer than the market expects thus leading to a significant drop in the stock market in the middle of 2023. How do we make money? - Buy commodity producers and ETFs
- Buy China stocks
- Stay long US stocks but keep stops tight.
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Words Of Wisdom The Little Book of Market Wizards by Jack D. Schwager "There is no single market secret to discover, no single correct way to trade the markets. Those seeking the one true answer to the markets haven't even gotten as far as asking the right question, let alone getting the right answer." | |
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