Led by Wall Street’s magnificent copper squeeze:
The argument for copper is well-known. Rewiring for decarbonisation is driving new demand, and supply is limited. We disagree for a number of reasons.
However, the blowoff underway is now also driven by other lingering factors:
- geopolitics leading to resource nationalism;
- inflation hedges;
- and, believe it or not, a new boom in Chinese housing!
The geopolitical argument is sound. The risk of a Great Power conflict has risen in the past few years. That risk is being reflected in some markets, like iron ore, which is busy diversifying sources and stockpiling steel. Deglobalisation makes it worse:
Gold is the big winner here.
Inflation hedges in commodities do not appeal because I don’t think we have a structural inflation problem. But there is a feature of reflexivity here that means it doesn’t matter what I think. If enough investors believe it, they’ll inject inflation via commodities, at least until such a time that central banks squash them or the price blowoff collapses upon itself.
The last reason is the least worthwhile and the hottest right now. Goldman:
Another batch of property easing measures: The PBOC announced four property easing measures on Friday (May 17):
(1) Providing RMB300bn relending for local governments to purchase properties from developers and turn them into social housing;
(2)Lowering the minimum downpayment requirements to 15%/25% from 20%/30% for first/second home purchases, respectively;
(3)Removing the national floor for mortgage interest rates;
(4) Cutting loan rates for housing provident funds by 25bp.
Although some of these measures are unprecedented (e.g., the minimum downpayment requirement was never below 20% previously), they are still insufficient compared to our property team’s estimates of at least RMB1tn funding needed to start digesting excess inventory and to allow new home prices to find a bottom within a year.
In the latest release, the NBS 70-city property prices showed an accelerated decline in April.
The one feature that has been consistent about all the stimulus packages on the way down is that they all let the great housing build-out continue to unwind.
There is a very good reason for this. China has enough houses for everybody and Xi Jinping knows it.
He wants to renew capital productivity in China but can’t do it when pointless construction devours it.
The great metals madness that is Wall Street’s latest bubble has some real drivers and some bogus ones, meaning that some re-ratings will last while others will not.
