Aa warning about a coming financial crisis
Tumbling commodity prices over the past week are a warning sign to investors that China’s “economic miracle” is actually a gross manipulation of markets that will eventually have a nasty ripple effect across the world, says an outspoken critic of central banks’ stimulus efforts.
“Something has changed, and more significantly, people have noticed the change,” says James Grant, publisher of Grant’s Interest Rate Observer, a highly regarded bimonthly commentary on the world’s financial markets.
Mr. Grant says the world’s major central banks have been distorting the true price of assets, such as stocks and commodities, by suppressing interest rates and printing trillions of dollars worth of currency in an effort to stimulate demand. He believes that such policies by the People’s Bank of China will prove particularly harmful given that they are layered on top of the central planning policies of the Communist Party.
Efforts by the U.S. Federal Reserve and other central banks to jump-start demand have failed, Mr. Grant argues. Each new dollar or yuan added to the economy is having less and less of a stimulus effect and is instead further inflating asset and consumer credit bubbles. As China’s economy continues to slow, commodity prices will decline further, and it’s possible that China will even slip into a recession, he says.
In today’s world of suppressed interest rates and manipulated markets, financial crises come faster and more furiously, Mr. Grant says, noting that it took 25 years for stocks to rebound from the Depression in the 1930s but only four years for markets to recover from the financial crisis in 2009. The accelerated cycles are the result of distorting policies and they leave governments and markets “more accident prone,” he says.
Investors should respond by keeping large amounts of cash, looking for buying opportunities in depressed sectors. At the moment, shares of mining companies look like one of the best contrarian plays, he says.
Mr. Grant is also a huge fan of bullion, which he categorizes as a monetary asset rather than a commodity. “The price of gold is the reciprocal of the world’s faith in management of the world’s central banks,” he says. “If you believe that they are in charge of events, as opposed to events in charge of them, then you do not want to waste your time with gold.”
Betting on an upturn in commodities
China’s slowing rate of economic expansion could actually be good news for investors, says Mark Mobius, executive chairman of Templeton Emerging Markets Group.
Taking some steam out of the national economy reduces the risk that China will overheat, a scenario that has spooked markets several times in the past few years. The world’s second-largest economy simply cannot keep growing at a 10-per-cent clip, or even the 8-per-cent rate it has hovered near more recently, the money manager says.
Four to five years from now, China will likely be expanding at a more sustainable rate of 4 to 5 per cent annually. “China is still a very dynamic economy,” says the 76 year-old globetrotter, who has spent more than 40 years investing in emerging markets.
While China has driven global commodity demand for the past decade, this week’s selloff in commodities should not be seen as the beginning of the end of the global commodity supercycle. Although the decline may continue in the short term, “later in the year we will probably see an upturn in commodities,” he says.
Hedge funds and other sophisticated investors probably had a lot to do with gold’s “frightening fall” in recent days, but the long-term trend for gold prices remains upward, argues Mr. Mobius, who directs Templeton’s emerging markets research team. “Personally, I’m buying more [gold] at this stage of the game.”
He sees price support coming from India, the world’s largest consumer of the precious metal, where demand in recent years has always gone up when global prices dip. In addition, he thinks that in trying to stimulate the economy, the world’s major central banks will eventually stoke inflation, driving investors to bullion.
Commodities producers have begun cancelling large new production projects and that trend will continue. But Mr. Mobius says his fund will continue to hold their shares and will increase certain holdings when prices look cheap.
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- Updated February 12 4:00 PM EST. Delayed by at least 15 minutes.