• In a recent article from the Peterson Institute, Monica de Bolle points out that much of the current South American angst can be tied back to the collapse of commodity prices. 
  • This does not account for the entirety of the issues, certainly. But it does provide a useful framework. 
  • The end of the "dual stimuli" in 2014 (China fiscal stimulus + U.S. monetary stimulus) seems to be the turning point for many of the commodity producing juggernauts - in particular South America.
  • A slower pace of global growth with a strong U.S. dollar as China's growth rate has retreated has been a persistent headwind for commodities. Could a reprieve be coming? 
In 2014, the U.S. and China were pulling back there stimulus measures implemented in the financial crisis. For its part, China had undergone a tremendous amount of fiscal spending to power through the financial crisis. The U.S. had gone full-throttle on monetary stimulus with a few rounds of QE and firmly planting fed funds on the zero lower bound. The "dual stimuli" article lays out the pieces in far more detail (links above). 

But the focus of dual stimuli was admittedly broadly on the potential effects for developed countries with Canada and Australia the focal points. As de Bolle points out, the commodity boom brought about a significant reduction in poverty rates across Latin America. Commodity prices were elevated for the better part of a decade leading to promises and prospects that simply cannot be delivered with commodity prices lower.

This is one of the unintended consequences of the commodity price crash: developed market consumers benefit, developing economies slow. 
Much of the commodity price pressure can be blamed on slowing Chinese growth, but that is not the entire story. China is roughly 20% of global GDP on a PPP basis, and constitutes a much of the incremental growth in the global economy. When China's growth slows, the ripples are felt in many places. 

Commodity prices and China's growth rate are understandably intertwined, and that may be a difficult correlation to break down. Why? It is difficult to pinpoint the next major tailwind. And - even when speculating on the next tailwind - timing is a further difficult hurdle to overcome.
But why not try. Of the three major headwinds to commodity pricing in the post-dual stimuli world (end of China's building spree, U.S. dollar following QE, and slower overall global growth), the U.S. dollar is the most likely to abate as a headwind in the near-term. Global growth is dependent largely on U.S. and China trade policy, but there could be a marginal shift higher in growth (the worst might be over). Replacing the rapid growth of China is not easy to see. India is gaining share of global GDP. But it is not easy to see the path to a full replacement of the China commodity cycle. 

The end of the dual stimuli turned out to be a problem. But the dual taper may be over.  Some of the headwinds may abate with the dollar pulling back and global growth appearing to stabilize. But there does not appear to be another China on the immediate horizon. So, there is likely to be less pressure, but it is unlikely to be a boom.

As always, feel free to reach out with comments or questions. Also, please forward to anyone who might want to be on the list. Here is the sign-up page, and here is the archive. 




Samuel E. Rines
Chief Economist
Avalon Investment and Advisory 
Direct: 713-358-6077
2929 Allen Parkway, Suite 3000
Houston, Texas  77019

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