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Now Comes The Great Unwind - How Evaporating Commodity Wealth Will Slam The Casino
Submitted by David Stockman via Contra Corner blog,
The giant credit fueled boom of the last 20 years has deformed the global economy in ways that are both visible and less visible. As to the former, it only needs be pointed out that an economy based on actual savings from real production and income and a modicum of financial market discipline would not build 65 million empty apartment units based on the theory that their price will rise forever as long as they remain unoccupied!
That’s the Red Ponzi at work in China and its replicated all across the land in similar wasteful investments in unused or under-used shopping malls, factories, coal mines, airports, highways, bridges and much, much more.
But the point here is that China is not some kind of one-off aberration. In fact, the less visible aspects of the credit ponzi exist throughout the global economy and they are becoming more visible by the day as the Great Deflation gathers force.
As we have regularly insisted, there is nothing in previous financial history like the $185 trillion of worldwide credit expansion over the last two decades. When this central bank fueled credit bubble finally reached its apogee in the past year or so, global credit had expanded by nearly 4X the gain in worldwide GDP.
Moreover, no small part of the latter was simply the pass-through into the Keynesian-style GDP accounting ledgers of fixed asset investment (spending) that is destined to become a write-off or public sector white elephant (wealth destruction) in the years ahead.
The credit bubble, in turn, led to booming demand for commodities and CapEx. And in these unsustainable eruptions layers and layers of distortion and inefficiency cascaded into the world economy and financial system.
One of these was an explosion of CapEx in the oil patch and the mining sector in response to massive price and margin gains and the resulting windfall rents on existing assets. In the case of upstream oil and gas, for example, worldwide investment grew from $250 billion to $700 billion in less than a decade.
Needless to say, there is now so much excess supply and capacity on the world market that oil has plunged into a collapse that is likely to last for years, as old investment come on-stream while world demand falters in the face of the gathering global recession. Already, investment is estimated to have dropped by 20% in 2015, and that is just the beginning.
This unfolding collapse of oil and gas investments, of course, will ricochet through the capital goods and heavy construction sectors with gale force. Eventually, annual investment may decline by $250 to $400 billion before balance is restored, meaning that what were windfall profits and surging wages and bonuses in these sectors just a year or two back will evaporate in the years ahead.
Contrary to the circular logic of our Keynesian central planners and Wall Street stock peddlers, the pending massive loss of value added capital spending in the energy patch is not a part of some grand reallocation game; it won’t be made up by households—-which are already at peak debt—— borrowing even more in order to go to the restaurant or yoga studio.
Instead, as the credit bubble begins to shrink it means that profits, incomes, balance sheets and credit-worthiness are all shrinking, too. So is the related GDP.
The same kind of malinvestment occurred in the mining sectors where Australia’s boom in iron ore, coal, bauxite and other industrial materials provides a good proxy. As shown below, CapEx in mining grew by nearly 6X in less than a decade.

But given the massive oversupply and plunging prices and margins in these commodities, and the overhang of still more capacity in the pipeline coming to completion, it is fair to say that investment in the global mining industry is sinking into a depression that will last the better part of a decade.
Indeed, as shown above, global mining industry CapEx soared by 5X during the seven years through the 2012 peak, but the overwhelming share of that was in greenfield and brownfield investments. Yet given the massive global overcapacity in iron ore, copper, metallurgical coal, bauxite/alumina etc., those kinds of projects are likely to be few and far between in the years ahead.
Needless to say, that means shrinking profits and the massive loss of high wage jobs and vendor service contracts. Even baristas at Starbucks do not earn a fraction of what had been paid to miners and UAW members on the Caterpillar assembly line.
Nor was the credit-fueled CapEx boom limited to energy and metals. Bloomberg carried a story today outlining a similar super-cycle in the global rubber industry. As a result of massive rubber plantation expansion in response to soaring prices and windfall profits, the industry is now facing investment and job killing surpluses as far as the eye can see.
Global demand for natural rubber, used mostly in tires, is slowing as the economy cools in China, the world’s largest buyer of new cars. Supplies are expanding after a decade-long rally in prices to a record in 2011 encouraged top producers like Thailand, Indonesia and Vietnam to plant more trees. Output will exceed use for two more years, with the surplus quadrupling in 2016, according to The Rubber Economist Ltd., a London-based industry researcher.
……Rubber traded in Tokyo, a global benchmark, has tumbled 70 percent from a record in 2011, touching a six-year low of 153 yen ($1.26) a kilogram on Nov. 6. Futures in Shanghai have slumped 22 percent in 2015. The export price from Thailand, the top producer, is down 23 percent…..
Global production is set to exceed demand by 411,000 metric tons next year and by 430,000 tons in 2017, compared with a surplus of 98,000 tons in 2015, The Rubber Economist predicted on Dec. 9. Output will increase 3.8 percent next year to 13 million tons and will keep expanding through 2018, the researcher said. Consumption won’t grow nearly as fast, which will leave stockpiles by the end of 2017 at a record 3.7 million tons, said Prachaya Jumpasut, managing director of The Rubber Economist.
Excess supplies may keep prices subdued for a decade, said Hidde Smit, an industry adviser who has studied the market for more than 30 years and is the former secretary-general of the International Rubber Study Group. Even with some smaller farms cutting back now, the planted area across 11 Asian countries that are the primary growers has surged 45 percent since 2004, he said.
So with producer profits and incomes falling in commodity sectors and capital goods industries all over the world, there is no prospect of a smooth rotation into more services and consumption. Deflation means not just lower oil or steel prices; it also means the evaporation of production and incomes which were falsely inflated by the 20-year credit binge.
And that’s not the half of it. The massive windfalls on commodities and capital goods earned by producers during the great credit inflation were not entirely reinvested in new capacity and fixed assets. As the Wall Street Journal documented recently, it also enabled a huge increase in the balance sheets of sovereign wealth funds due to state ownership or heavy taxation of oil and mineral production.
But now the days of heady accumulation of “sovereign wealth” in Saudi Arabia, Norway, Kazakhstan and dozens of commodity producers in between is over and done. What is happening is that these funds are entering a cycle of liquidation which is unprecedented in financial history.
Indeed, the data for Saudi Arabia, Qatar, Kuwait, the UAE and other members of the Gulf Cooperation Council (GCC) is stunning. During the global credit boom they amassed sovereign wealth funds totaling $2.3 trillion. But with deficits now estimated at 13% of GDP and rising, the level of asset liquidation is soaring.
Thus, if crude oil prices recover to $56 per barrel next year, the GCC states will need to liquidate $208 billion of investments. Yet if prices fall to $20 per barrel, as Goldman Sachs has warned, they would need to liquidate nearly $500 billion of their booty in a single year.
But regardless of the exact crude oil path in the years ahead, prices are sure to stay in the sub-basement for an extended period. That means that the GCC states may need to liquidate the entirety of their sovereign wealth funds by early in the next decade.
The same is true on a worldwide basis for all of the energy and mineral based sovereign wealth funds. They will be in a liquidation mode for years to come as the great commodity deflation runs its course.
In a word, the unnatural Big Fat Bid of the sovereign wealth funds is going All Offers as oil and commodity producers struggle to fund their budgets.
Stated differently, just as the commodity bubble effects did not stay contained in the energy and metals markets as the global credit bubble expand, the same will be true in the deflation cycle.
The unfolding correction of the visible excesses of the credit inflation - such as overinvestment and malinvestment - will destroy incomes and profits; the Great Unwind of the less visible effects, such as the sovereign wealth fund liquidations, are a giant pin aimed squarely at the monumental worldwide bubbles in stock, bonds and real estate.
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Hardly such thing as 'commodity wealth' in the land of the bottomless leveraged paper casino. UNLESS!
Because when you have $200+ trillion in debt globally, real enduring wealth is in digital fiat debt money.
ENERGY Sector "what were windfall profits and surging wages and bonuses in these sectors just a year or two back will evaporate in the years ahead."
This is already crushing Canada and North Dakota, whose actual oil field cut backs are only now beginning as they tried to produce their way out of the debt crisis. But the hedges have run out, prices seem glued to the basement and NOW the time has come to eliminate the expeditures. That mean people losing jobs all up and down the line.
Stockman is brilliant here, as always.
I was watching "The Big Short" last night too. Excellent film. Very historic and everyone should watch it.
Enjoy....:
http://movie25.hk/the-big-short-2015-63736.html
Stockman: Evaporating Commodity Wealth Will Slam The Casino
Who are you kidding?
Stockman doesn’t get it: Evaporating Commodity Wealth Will Slam The Commodities EXPORTERS—mainly the 3rd world.
The casino—US and its junior partner, England—runs the world finances and its hitmen. They could care less.
http://www.amazon.com/gp/product/0452287081?refRID=T7S3PS2HT3W4A48VZHS5&ref_=pd_ybh_a_41
For the readers that don’t have enough time to research how the world is run. Oversimplified, but you’ll get it:
In 1846, England, the most advanced society back then, open up for free trade—laissez-faire. By 1914 England could no long compete. By 1920’s, England closed India to foreign investments and its Empire to exports. US closed the Philippines. The Dutch closed Indonesia. By 1930’s Japan had no access to resources and markets.
https://www.youtube.com/watch?v=8mxp_wgFWQo“#t=10m14s”
Houston Commercial RE in for Big Trouble 2016
"We’ve got a huge supply issue, and demand is almost negligible at this point," Bellow said. "Demand is extremely stagnant and arguably decreasing. Landlords have to get aggressive."
Buildings that either have roughly 80 percent or less occupancy, have one of its largest tenants rolling over to 2016 and 2017, or are being built on spec are likely signing on tenants at rates that are around 30 percent lower than they were in 2015, Bellow said.
http://www.bizjournals.com/houston/morning_call/2015/12/heres-how-landlo...
Energy jobs decimated and so plunges commerical and residential RE in energy towns like Houston. My neighbor just unloaded two of his three rental houses telling me it's going to be a bloodbath since even tenants now are refusing to pay rent or skipping out in the middle of the night with a few months of unpaid rent and lots of damages.
I have an ex who bought a house in Houston in Q1 of 2013.
Wonder how she's doing now...
Roach,
It was exactly like that in the 1980's, I remember a real estate broker leasing about half an office building to my company and the owner gave him a new Mercedes 500 as appreciation. My company was from Chicago so the owner must have seen manna falling from heaven.
It was really bad then, a high percentage walked the notes as they did in NV a few years ago. Looks like a rinse and repeat, sad. It seems that I recall that oil dropped to about $10 which is probably equiv to 15-20 on todays $$.
Well in USD terms you are right. But a new finacial and monetary system is on the way. So in short therm you are right in long therm the West is royally screwed and the 3rd world is on the right side.
i like your pick so I always +1 you, regardless of the substance of your statement.
Banks have taken over the world. They actually control markets and governments. This is no surprise, only the corporate media works hard to hide this fact.
There are no markets, no price discovery. Banks simply manipulate the world financials and feat off of their corrupt gains. Instead of going under in 2008, as all the laws of free markets whould have indicated, they instead used political power to force their losses onto tax payers, and then used politicians to hand over the keys to the kindom directly to the banks.
Too Big To Fail. That means more than just, thye must be bailed out. Any entity that is too big to fail, no matter what the cost, if they are guaranteed their existence. That makes them rulers of the world in effect.
From the archives:
http://www.zerohedge.com/contributed/goldman-sachs-rules-world-have-you-...
http://www.zerohedge.com/news/2014-09-26/how-goldman-controls-new-york-f...
http://www.zerohedge.com/news/2014-09-28/i-am-putting-everything-goldman...
Agreed. Guillotines it is. Where do we start?
Are you kidding us?
We’re just bloggers here and not neocons—you know, the ones that do the killing.
One used to get a toaster when one became a Bank customer. Now, as customer one gets a imported muslim neighbor and a notice to NSA for any transaction over $5k.
Or a brand new drilling rig in Midland-Odessa. If not now, coming to a grand celebration again soon.
Reading this article raised a question which I would appreciate fellow ZHers input on.
We're pretty much all stackers. Agreed? And we stack because we don't trust fiat money? Agreed?
But life still carries on whilst the ponzi scheme continues. So, how much of your portfolios do you allocate to fiat cash? I don't want to be too PM heavy (when I had it. Damn leaky boats...). Any input would be appreciated.
As for the article, it's pretty much the same as other articles. Big unwind, banks are corrupt and stocks & commodites are crashing. But I think life will carry on throughout 2016. I hope I'm wrong, but I was wrong in 2011, I was wrong in 2012, I was wrong in 2013, I was wrong in 2014 and I was wrong in 2015. So why would I think 2016 will be any different? In fact, 2016 is election year in the United States and Pres. Obama will NOT want a crash on his watch, so he will throw everything he has to stave it off until the new Prez inaugerated.
In short, move along people, nowt to see here....
As with any financia advice,depends on your age,income, dependants etc etc.
Hubby's Rule of Thumb...
House paid off (unless you are planning to do a runner in which case a live aboard ocean going sailboat will be better)
1/3 PM's (1/4 of that in silver)
1/3 USD in cash (mostly out of the banks) 1/3 of the cash in 20's in a well hidden safe at home. 1/3 of the cash rotating in the bank to pay bills. 1/3 of the cash in shorting stocks long term (no margin)
1/3 in any business that does not require heavy capital investment or a chacrita with a house in the Andes which costs only 40k to 80k
..and do adjustments based on your situation.
100 percent fmj 9mm - thousands, like cases(500).
100/13 > 100/24 > 100/??(certainly not less) rem. or win aprox discount price...
plus utility way beyond any fucking shiney shit...
or 22, 45, 40, 223, 308.
reloader
smelter
primers
ect.
all good investments...
"real production and income and a modicum of financial market discipline would not build 65 million empty apartment units based on the theory that their price will rise forever as long as they remain unoccupied!"
DS misses the agenda 21/2030 point of herding the aging demographic into the blade runner cities of the future.
There's a plan alright, market discipline be damned.
Broken windows, mate! All the world needs now are more broken indows. Will 2016 go down in history as the year of "broken windows"?
destroyed countries, courtesy of neocons from ussa. bankers dream, calling lagard'e'...
I have noticed in the last 2 or 3 articles from Mr. Stockman, that he seems to hedge himself with the '20 year' meme - as if to suggest this shit all got started well past the administration he worked in... Stockman is a smart/level-headed individual, but even David himself knows that any chart which plots housing prices, show the genesis of this credit-fueled shit-show getting its 'legs' during the Reagan's 1st term, and never looking back. There is a reason for that, and it is called the beginning of easy credit and finance (in more ways than one...)
Therefore it is just a bit disingenuous to suggest the great unwind of this experiment belongs to Billy Jeff, Rubin, Summers and the other Tribe member who made it to the cover of TIME way back in the 90's... In fact, one could argue this goes back to 1971, 1937, 1929 and 1913, but the floodgates of fiscal (and monetary) un-discipline were thrown wide open during the 80's, and that's just plain fact.
You're exactly correct. The last US President to try to honestly address the collapse of what we used to call "Capitalism" was Jimmy Carter, and we all know what happened to him. Not coincidentally, the first US President to take a completely fictitious, made-for-TV approach to pretending to solve our problems while actually papering them over and cravenly handing over everything worth having in America was Reagan.
Even Carter was smart enough to not call the issue by its real name; the logical, mathematically certain outcome of a system that uses debt at interest as money and required infinite growth on a finite planet. But that wasn't enough to save him. Since he got his ass kicked, every President since has retreated further and further into pop-culture fantasyland. To the point that we now have a Reality TV character stomping all contenders in the pre-primary Presidential campaign season.
Stockman knows all this, too. He was young and sappy enough to have believed his own bullshit in 1981, but since then he has to have learned that if you have a simple solution to the troubles of a complex system, you're wrong.
"The Decade of Greed", IIRC.
The only solution I see is the printing of more fiat.
The politicians dont want a meltdown on their watch. The banks want more fiat which allows loans (on their books) to be serviced. The people in general dont want a meltdown either and will support measures that delay the day of reckoning. Everyone wants for themselves enough time to get to retirement with their retirement savings intacked.
Helicopter money will come. What person will not take free money from the Government. When you can print as much as you like, there is little risk in the short term. If all goverments do the same, were does one point the finger as all countries in the world suffer hyper-inflation.
The erosion of purchasing power will be slow at first and then accelerate. This also gives time for the Banks and .Gov to find some one or some thing to blame. I dont see anything will change unless TPTB make a mistake, which is unlikely.
The real point is that Helicopter money has been fueling the economic growth till now. But the Helicopter money came in the form of increased debt.
In my country, we have a joke that, US not only sells products but also provides the money to buy it. That's the helicopter money that I am talking about.
You invest in oil production, then sell it to people who cannot afford it by printing more money and lending it to them.
What can be the suitable ending the this fiasco?
Inflation is already all around us. If prices are not allowed to fall according to market demand and supply, than the existing price becomes the inflated price.
Lend you worthless paper and accept raw materials, beautiful islands, infrastructure, et al, as payment. The bankers have the gold and you get the shaft.
The machines, alas, do not pay for themselves. So, escalating debt, while unfortunate, is the only way to keep industrial sociey going. It's a Hobson's Choice.
< will end in a One World Government
< will end with a new global system run by Asia, and the US left out.
<will end in a Mad Max scenario.
<will end like the future cuts from the original Terminator.
How much of the world's debt is actual claims ( debt), and how much is naked created-out-of-thin-air fiat.
I changed some investments, please tell me if I'm all wrong.
my reasons for changing are.
#1 Russia going into Syria, and Iraq leaning towards Russia as partner.
#2 e.u.'s immigration.
#3 turkey in the jackpot.
#4 aiib up and running.
sure Russia, and china having trouble, more internal in china than Russia, but I'm betting they'll hold together longer than u.e.
as a percentage there's just as many Europeans disgusted in their union as there are americans with their govt..
now the nuts and bolts of my very limited seat of the pants financial understanding, and experience.
between brics"I", aiib, now thanks to imf new rules, dollar trades, countries will be no different than your average citizens, barter works how many billions of consumers are in just these two org's?
if most of the em's are interested in rebuilding, or upgrading infrastructure, or want to spend on some capex, china has some building materials laying around cheap, for me I'd love to see whole co's build near these so called "ghost cities in china", until the pipe-lines, and car, rail transportation systems start up.
I'm thinking ems. will sell ust's, if necessary borrow in yuan then piggy-back the Yuan fx movements which will be busy.
I can only assume countries in the aiib, and brics"I", will have #2, and #3 worlds military at their backs.
now what I did, took money from mmmf's put in
to tip's out to where my grand-children will be out of college, good, or bad?
personally I won't live to be around to see a 2yr. T-bill mature, but I do want to see my heirs left something.
I know it's probably a long shot, hoping for an honest inflation reading. and a real chore to keep the long bond down.
help. thank-you tyler , and everyone on zh, happy new year.
oh a little background I have phys. au/ag, some small denomination fiat, can't be called a stacker or a prepper, but I can last several months, barring drones.