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David Rosenborg:Bet on Commodities


It’s called trade protectionism.  First came the U.S. tariffs on Chinese-made tires a few weeks ago.  Then lat week we saw the EU impose anti-dumping duties of nearly 40% on imports of steel pipe from guess where?  China.  And now we hear out of Australia that its foreign investment regulator wants to impose 15% caps for global purchases of the country’s large companies.

What really caught our eye last week was this reference to the U.S. decision to slap on tariffs in the NYT, a newspaper that is generally supportive of President Obama’s policies.  To wit:

“While labor’s opposition to free trade is nothing new, having an ear in the White House is.  The Obama administration, though it says it supports free trade, has so seemed more aligned with labor’s trade agenda than has any administration in decades.”

Hence our bearish view on the U.S. dollar, though we acknowledge that the greenback is oversold technically and could be ripe for a rebound if investor risk appetite subsides in coming weeks or months.  That said, any administration that engages in erecting trade barriers to placate unions is an administration that would likely be none-too-perturbed to see its currency depreciate in order to bolster local export competitiveness and surreptitiously build a wall against imports.

As an aside, when it comes to the question as to whether China’s consumer base is picking up at least some of the slack from the deflated U.S. consumer, the answer is affirmative — and remember, China is the marginal buyer of basic materials; Americans are the marginal buyer of services (60% of the CPI is in services).  Between 2000 and 2008, Chinese consumer spending has risen at an average annual rate of 8.0%.  While it is only 41% as a share of Chinese GDP, versus 70%+ in the U.S.A., what that means is that there is greater potential for consumption growth there to expand on a secular basis as it is has already.

According to the FT, China’s incremental consumption of tradable goods — the key for commodities — stood at $275 billion, NINE times larger than the service-dominated U.S. consumer.  Now put that in your pipe and smoke it!

There is also no doubt —this is a fact, not an opinion — that the China Investment Corporation is increasingly diversifying into a broad range of commodities, both hard and soft.  See China Sovereign Fund Bets Big on Resources on page C1 of last Thursday’s WSJ (best not to bet against entities
like these with extremely deep pockets — this is a $300 billion fund) and CIC Makes Food Security a Priority” on page 22 of the Wednesday FT.


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