Morning Note: China Passing the Buck

I mentioned in last week’s macro update that Chinese authorities are presently focused on/concerned over the rising price of industrial metals. Clearly, per the weekend news, that is indeed the case; China’s National Development and Reform Commission warned commodity firms that they’ve “zero tolerance” for hoarding or monopoly behavior. 

Yep, as when supply/demand dynamics have in the past had essential commodities (oil for example) pushing the upward bounds of record prices, authorities love to blame market makers for what are generally their own failings. This time’s no different in my estimation.

Thing is, while the bull market in industrial metals can indeed be slowed by such threats, over the longer-term, however, it’s going to be very tough to tame. 

Here’s from Marathon Resource Advisors January ’21 Macro Thoughts:

“The UK Government recently supplemented its pledge to mandate 100% EVs in 2050 by declaring that all sales of new cars would need to be electric by 2035.” 

“…in order to meet those goals, the island nation would require incremental materials equating to 50% of the world’s annual copper production, 75% of its lithium output, 100% of rare earth metals including neodymium and almost twice the current annual output of cobalt.” 

“In other words, the climate aspirations of a nation representing less than 1% of global population outstrip the mining industry’s current ability to deliver incremental supply by 1-5x.”

I.e., despite the short-term volatility, I suspect we’ll be holding our base metals, rare earth and lithium mining positions well into the foreseeable future. 

Asian equities leaned green overnight, with 9 of the 16 markets we track closing higher.

Europe is, on balance, in the plus column as well: While 4 of the 19 bourses we follow are closed today, 9 of the open 15 are trading up as I type.

U.S. major averages are higher across the board. Dow up 164 points (0.47%), SP500 up 0.76%, SP500 Equal Weight up 0.53%, Nasdaq 100 up 1.23%, Nasdaq Comp up 1.09%, Russell 2000 up 0.82%.  

The VIX (SP500 implied volatility) is down 4.67%. VXN (Nasdaq i.v.) is down 3.25%.

Oil futures are up 2.30%, gold’s up 0.01%, silver’s up 0.82%, copper futures are up 0.70% and the ag complex is down 0.88%.

The 10-year treasury is up (yield down) and the dollar is down 0.24%.

Led by tech stocks, Indian equities, metals miners, MP (rare earth miner), emerging market equities and silver — but dragged by ag commodities, oil services stocks, ALB (lithium miner), solar stocks and AT&T — our core mix is up 0.31% to start the day.

As I suggested above, governments love to blame markets for the consequences of their own failings. My oh my, China’s history!

“China’s mass application of subsidies for state-run firms means mills and refineries run whether there is demand or not. Such subsidization has helped Chinese firms dominate electronics and automobile assembly.

By the 2000s the overproduction so outpaced Chinese demand that it was dumped on the global system, wrecking markets near and far. In the 2010s the overproduction became so extreme that it surpassed global demand.”

Zeihan, Peter. Disunited Nations

Well, now we’ve come full circle. The pain the producers had to endure coming off of the latter has left them lean, profitable and in no mood to ramp up production like they did the last go round. Hence, global demand is now so extreme that it surpasses supply, big time!

Have a great day!

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