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July 23, 2015 | What Blows Up Next? Part 1: Resource-Based Economies

John is author or co-author of five books, including of The Money Bubble, The Collapse of the Dollar and How to Profit From It, Clean Money: Picking Winners in the Green-Tech Boom and How to Profit from the Coming Real Estate Bust. A former Wall Street analyst and featured columnist with TheStreet.com, he currently writes for CFA Magazine.

The Great Recession and its aftermath was actually the best of times for countries with natural resources to sell. The US, Europe and Japan ran record deficits and cut interest rates to zero or thereabouts, sending hot money pouring into mining and energy projects around the world, while China borrowed (as it turned out) $15 trillion for an epic infrastructure build-out.

The result was robust demand and high prices for raw materials like copper, oil and iron ore, and a tsunami of cash pouring into Brazil, Canada, Australia and the other resource producers. Conventional wisdom deemed these countries to be well-run and destined for ever-greater things, which led locals to borrow US dollars at cheap rates and invest in mines, factories and/or domestic government bonds with much higher yields. Good times and fat margins all around.

Then it turned out that the debts accumulated by the resource-consuming economies had created a headwind that they couldn’t overcome. The Chinese build-out abruptly ended and the developed world failed to achieve escape velocity, causing the US dollar to soar and commodity prices to plunge. Oil, for instance, is down 21% just the last in last six weeks. while the Bloomberg Commodity Index is 42% below its recent high.

For a sense of what this means, pretend you’re Brazil. During headier times your oil, iron ore and soybean exports created a generation of new millionaires and allowed your government to balance its budget. This in turn led your leaders to ratchet up spending and your entrepreneurs to borrow what now looks like an insane amount of US dollars.

Now your currency, the real, is plunging…

Brazilian real 2015

…while your interest rates are surging:

Brazil interest rate

Among other things, this gives you: a ton of dollar-denominated loans that are deeply under water and will be defaulted upon soon; plunging tax revenues necessitating huge cuts in government spending and/or much higher taxes — at exactly the wrong time; and hundreds mines and factories that aren’t generating enough cash flow to cover their cost of capital and will soon fail.

Variations on this theme are playing out across the resource economy world, so depending on the country, it’s crisis now (Argentina and Venezuela) or crisis in 2016 (nearly everyone else).

And that’s if everything stabilizes around these levels. Let resource prices keep falling and/or the dollar rise further and we can replace “crisis” with “chaos.”

For more, see:

Brazil slashes fiscal savings goals for 2015 and 2016 on plunging tax revenue

The Australian dollar is smashed and poised to fall below US70 cents, analysts warn

Mexican peso continues to sink

Canadian dollar drops to lowest level since 2004

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July 23rd, 2015

Posted In: Dollar Collapse.com

One Comment

  • Avatar Robert Laden says:

    So what is really going on? China continues to import more and more iron ore for making steel. But at much lower prices. What is all that steel being used for? Chinese businessmen are all over Africa and parts of South America building things. What things? More sources of raw material, and new infrastructure to bring the raw materials out and to bring-in more Chinese imports into those foreign markets.

    Have the Chinese consciously encouraged the over-building of raw material supplies in order to lower the long term cost? Didn’t the Japanese encourage the over-building of energy supplies after the oil crisis of the 1970’s?

    Maybe China is still okay? Too bad about everybody else?

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