By Ivan Martchev
February 4, 2020
A lot of people have been caught flatfooted calling for a hard economic landing in China in the past 10 years, not realizing that because of the opaque nature of state-sponsored capitalism – paradoxically the brainchild of the Communist Party of China (CPC) – such predictions are nearly impossible to make.
Regrettably, I have been among the guilty of the same fallible logic after the Chinese stock market crash in 2015, which I accurately predicted in April 2015, six weeks before the Shanghai Composite crash. The collapse of China’s economy has been nearly impossible to predict because of the grip Beijing has over the financial system, and the innovative ways in which they can intervene in the economy via injections of credit, which are more extreme compared to any other case in the history of capitalism.
Will the spread of coronavirus be the wild card that finally pops the monstrous credit bubble China has accumulated due to the numerous central government interventions over the years, ultimately aimed at eliminating the normal economic cycles from happening in China? It is simply too early to tell.
Like everyone, I hope that the coronavirus is contained, and I also prefer a Phase II trade deal, and a Chinese economy free to develop with less obnoxious government intervention. But neither the coronavirus nor CPC controllers in China care what I think. This is why the prices of oil and other major industrial commodities, like copper and iron ore, are very relevant, as they will be significantly less-doctored indicators of what is going on in China than anything officially released by China’s leaders.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The oil price has been a pretty accurate real-time indicator of what is going on in the Chinese economy, regardless of what the central government is mandating or its statistical releases say. The first major crash in the price of oil (related to China but not dissimilar to 2008), was the disarray in the energy markets in late 2014 and throughout 2015 that ultimately ended with WTI falling to $26. At that time the Chinese economy was rapidly decelerating as the central government was trying to rein in out of control credit growth. Such rapid decline in crude oil also came with the imposition of Iran sanctions as well as tariffs on Chinese goods that caused oil to go to $42, which also coincided with the Chinese economy notably decelerating partly because of the sanctions themselves. And now we have the viral leg lower in crude oil.
I think crude oil will take out the $50 level and ultimately retest $42 as travel and trade with China are being rapidly affected by the spread of the virus. It is unknowable what the true impact on the economy will be, as we don’t know the precise point when the virus will be contained. Doctors in Thailand reported last week that they had excellent results in a patient that tested positive for the coronavirus with a cocktail of HIV and other antiviral drugs, removing the virus from his bloodstream in 48 hours.
If oil takes out $40, I am pretty sure the next stop will be $26 due to the fact that China is the largest importer of crude oil on global markets, and this outbreak is affecting the Chinese economy rapidly. (It does not help that U.S. oil production is surging due to the shale boom.)
Calling Dr. Copper
At the time of this writing, the price of copper is still above $2.50 per pound. The London Metals Exchange Index has now convincingly taken out support at the 2700 level. I think the price of copper will follow and it may even fall below $2.50 before this writing reaches readers – or soon thereafter.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Industrial metals and energy are different markets, but they are both economically sensitive and are both driven by China as the primary source of demand. I think the LME index will go all the way to the 2000 level (where it was in January 2016), which means copper will likely flirt with $2. Even if the virus outbreak is contained soon, the shock to the Chinese economy still has the potential to take prices there.
Does $2 copper mean ultimately oil at $26? While nothing that involves the future in financial markets is a guarantee, it sure is a strong suggestion. We’ll reevaluate when we get there. For the time being a good target for the S&P 500 Index is the 3000 level (near its 200-day moving average), as before this viral outbreak the index was massively overbought and 11% above this moving average. I think there is enough momentum in the viral panic to get it there. Plus, do not forget that February is a terrible month from a seasonal perspective, and enough is happening to make that diagnosis apply to this February, too.
Also In This Issue
A Look Ahead by Louis Navellier
A Deeper Dive into Tesla’s Quarterly Report
Income Mail by Bryan Perry
High-Tech Income Looks Terrific Right Now
Growth Mail by Gary Alexander
Ending the Scourge of the Four Horsemen of the Apocalypse…is Bullish
Ivan Martchev is an investment strategist with Navellier. Previously, Ivan served as editorial director at InvestorPlace Media. Ivan was editor of Louis Rukeyser’s Mutual Funds and associate editor of Personal Finance. Ivan is also co-author of The Silk Road to Riches (Financial Times Press). The book provided analysis of geopolitical issues and investment strategy in natural resources and emerging markets with an emphasis on Asia. The book also correctly predicted the collapse in the U.S. real estate market, the rise of precious metals, and the resulting increased investor interest in emerging markets. Ivan’s commentaries have been published by MSNBC, The Motley Fool, MarketWatch, and others. All content of “Global Mail” represents the opinion of Ivan Martchev
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