Can empty credit create 'real' demand?

Jul 27, 2015

- By Bill Bonner

Bill Bonner
Vancouver, Canada

Dear Diary,

When we left you at the end of last week the world was falling apart.

As you know, the economy functions on credit, not cash. And without the US Fed pumping credit into the system, it sags.

The Dow fell 163 points on Friday. That is not significant in itself. But the chart shows a big hump heading to the downside. More significant, maybe, is gold - now trading $100 below what we thought was the floor.

Why?

It could be that gold is signaling a global recession/depression. The Chinese 'People's Daily' tells us that electricity consumption is accelerating at the slowest rate in 30 years. We all know the GDP figures are untrustworthy, but electrons don't lie. They flow with the economy. And they're now only increasing at a sluggish 1.3% per annum, suggesting a big slowdown in China.

Meanwhile, on the commodity highway, is a huge pile-up. A crash in the oil market left a massive slick. A barrel of oil sold for just $47 on Friday. Overall, commodities are at a 13-year low.

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The coal miners slid into the cheap oil and gas. In a recent newsletter, we showed why energy was so cheap; the feds dropped the price of capital so low that suppliers could produce it for almost nothing. When the cheap money came to an end, so would the cheap oil, we guessed.

But it hasn't happened yet. So far, cheap credit has exaggerated and prolonged the bear market in oil. Producers who should have shut down months ago are still pumping - kept in business by ultra-cheap financing. Coal, cheap when we wrote about back in April, is now even cheaper. Oilprice.com:

    Walter Energy, an Alabama coal miner, announced on July 15 that it is filing for bankruptcy. Senior lenders will see their debt turned into equity, and if the company cannot turn the ship around, it will more or less sell off all of its assets. "In the face of ongoing depressed conditions in the market for met coal, we must do what is necessary to adapt to the new reality in our industry," Walter Energy's CEO Walt Scheller said in a press release.

    Alpha Natural Resources, a top producer of metallurgical coal (used for steelmaking), was delisted from the New York Stock Exchange because its share price was "abnormally low." The company is eyeing the possibility of declaring bankruptcy protection.

    Arch Coal has seen its share price crater to similar depths that Alpha Natural Resources saw before it was delisted. Arch Coal pulled off a one-for-ten reverse stock split in an effort to avoid the same delisting fate as its peer. Essentially, the move to reduce the number of shares is intended to boost the share price, and it will take effect on July 27. But moves on paper won't change the underlying fundamentals.

    Coal prices are down 70 percent from four years ago...

Dr. Copper, too, says it's going to be a rough second half. Copper has earned the "Dr." title; the old timers say it is "the only metal with a Ph.D. in economics." Copper goes into everything - houses, offices, electronics, autos, you name it. So, when sales of copper go down, it means the world economy is going down.

Bloomberg:

    Goldman said prices will probably drop another 16 percent by the end of next year and expects Chinese demand to grow at the slowest pace in almost two decades. The Bloomberg Commodity Index fell 0.5 percent, a 13-year low.

    Expectations that the Federal Reserve will soon raise interest rates has strengthened the dollar, making raw materials priced in greenbacks more expensive for buyers in other currencies. The Bloomberg commodities gauge slid 26 percent over the past year on concern demand is slowing in top user China.

    Goldman on Wednesday lowered its copper-price outlook by as much as 44 percent through 2018, and expects the metal to reach $4,500 by the end of 2016. China's economy is growing at the slowest pace in 25 years, according to economist estimates compiled by Bloomberg.

Why the big slowdown? Why is the world falling apart?

Because you can't fake it. Instead of actually 'stimulating' a real recovery...the feds have 'simulated' a recovery. That is, they put out cheap financing to make it look like there was more money available. Commodity producers took the bait. They borrowed money and increased production.

But demand couldn't keep up. Because you can't get real demand from empty credit. You can only get more real purchasing power from Main Street, not Wall Street. And for that, you need a real recovery, not a phony one.

Tomorrow: Hillary Saves Capitalism!

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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