Brace for the mining GFC

Alas the jig is up. Mining is now at the centre of a growing global storm that is going to end the business cycle. There is no bottom under mining, it is in free fall and has far yet to drop as commodities crash. It is a part of the accelerating emerging market rout that appears increasingly likely to prevent any US rate hike as well.

Using the GFC analogy helps understand where we are. The analog is simple and compelling and works like this:

1. easy US money grew a housing bubble and contributed to global imbalances via a “chase for yield”;
2. as monetary tightening crimped flows, the banks mediating the funds were revealed to have mis-allocated capital to sub-prime mortgages;
3. in September 2007 it became impossible to value the mortgages as they were bundled into whacky securities;
4. the US financial system froze progressively over a year as the securities became known as “toxic assets” until one the of major banks went under;
5. counter-party risk soared and froze the entire global financial system, and
6. global recession ensued.

This time it is analogous:

1. easy US money grew an emerging markets and commodities bubble via a “chase for yield”;
2. as monetary tightening crimped flows, the banks and markets mediating the funds were revealed to have mis-allocated capital to miners and EMs;
3. in September 2015 it became impossible to value the miners and EMs as commodity prices crashed, sophisticated trading houses reeled and the EM debt was buried in the private sector;
4. global markets for commodity and emerging market progressively dried up as both became “toxic assets”;
5. at some point, big miners and emerging market economies defaulted on their debt and counter-party risk soared across the global financial system, and
6. global recession ensued.