I regularly read Niels Jensen’s monthly letter, and this month’s edition is exceptional. Longtime readers will know that he has been featured in Outside the Box several times over the years. Today, Niels challenges the widespread belief that the steep drop in commodity prices is all about the economic slowdown in China. He also questions whether China is in fact more a victim than a villain of the recent plunge in global equity markets. He arrives at the conclusion that high and rising debt levels amongst corporates in emerging markets, in combination with a strong US dollar – particularly when measured on a trade-weighted basis – is a more likely cause of the fall-off. This is a very nonconsensus view, but it’s one that I found fascinating to seriously think about. And you probably should, too.
Will the current turbulence in global markets lead to a repeat of 2008, as many have suggested? Niels’ take on that question is interesting and convincing; but rather than spill his beans, I’ll turn you over to him.
I finish this quick introduction in a very cold and snowy Chicago – quite the contrast from the weather we’ve been enjoying in Texas. For the past two days I have been speaking about and in meetings discussing portfolio design, which is a topic I don’t often write about but do get a lot of questions about.
I’ve thought hard the last few years about how we should structure portfolios, especially our core positions, given my view of how the world is going to transform over the next 10 years. How can we make certain we’re in the markets at the right times and not in there when we don’t want to be? Or at least be reasonably sure? I’ve begun sharing my ideas with senior investment professionals around the country, and they and I think I may really be on to something special. I will be sharing these ideas in private and then making them publicly available within the next few months.
Working on the new book, it’s a challenge to try to describe not only how the world will change in 20 to 25 different areas but also how we should invest in the meantime. This process of thinking more long-term but accepting that we live and invest in a short-term world has gotten me to reconsider what to many of us has been a basic assumption. Is it possible that we are diversifying the wrong parts of our portfolios? Maybe… Coming soon.
It’s time to put on the jackets and scarves and gloves and brave the rush-hour traffic from Wheaton into downtown. In snow and ice. I can’t tell you how much I’m looking forward to it. At least I’m not the one driving. And yes, I will be very buckled up and padded…
Your getting more excited about the future analyst,
John Mauldin, Editor
If Only We Could Blame China
Niels C. Jensen, Absolute Return Partners
March 1, 2016
“When you combine ignorance and leverage, you get some pretty interesting results.”
– Warren Buffett
One thing we are exceptionally good at in the West is to blame China for pretty much anything that goes haywire. If you believe various commentators, it is all China’s fault that global equity markets have caught a serious cold more recently and, before that, China was blamed for the extraordinary weakness in industrial commodity prices. They have weakened – or so the argument goes – because China’s growth is not quite what it used to be, and commodity producing countries are over-producing as a result.
Whilst entirely correct that China’s GDP growth rate has indeed slowed substantially, perhaps someone should consider whether China is as much the consequence as the cause; whether China is in fact a victim rather than a villain? Let me explain.
The recent history of commodity prices
Commodity prices peaked in early 2008 (per the Bloomberg Commodity Index), only to fall dramatically as the Global Financial Crisis (‘GFC’) took its toll. Between 2009 and 2011, a substantial part (but not all) of those losses were recovered again, but since early 2011 it has been pretty much one way traffic. I do note, though, that in the early stages of the post-2011 fall in commodity prices, oil did not participate at all, as oil prices were pretty much flat between April 2011 and June 2014.