Central Banks Have Shot Their Wad – Why The Casino Is In For A Rude Awakening, Part I – David Stockman’s Contra Corner 07-25-15

Salient to Investors:

David Stockman writes:

The central banks have shot their wad after increasing their aggregate balance sheet from $3 trillion to $22 trillion over the last 15 years, which falsified financial prices.

The coming deflation will bring a plunge in corporate profits and collapsing prices of vastly inflated risk asset classes. The Bloomberg commodity index will fall below the 100 index level as the cycle from asset accumulation and inflation to asset liquidation and deflation continues. The lagged effect of the project completion cycle causes excess capacity to continue to grow, meaning the plunge in commodity and industrial prices and profit margins has only just begun, and will fall for years to come. Production cuts and capacity liquidation in virtually every materials sector is being drastically delayed by the continuing availability of cheap finance, meaning prices and margins will be driven even lower than would otherwise be with excess capacity.

Central banks engineered massive household borrowing and consumption/housing spending in the developed economies which then ignited an export manufacturing boom in China et al which over-taxed the supply of raw materials as the commodity price boom peaked with $150 oil in July 2008. Governments and central banks then battled the plunge in consumer spending and liquidation of bad mortgages, excess inventories and over-stocked labor by triggering a second artificial economic boom in CapEx and infrastructure spending in China and the emerging markets. China’s total debt went from about 150% of its GDP in 2007 to nearly 300% of GDP today.

Central bankers drove interest rates towards zero to try to spur spending by the middle classes, already at peak debt, but instead generated a scramble for yield among money managers and capital outflows of $4-5 trillion into emerging market debt: the resulting tidal wave of capital investment caused a second surge of commodity prices which peaked in 2011-2013. The monetary expansion has left the developed world at peak household debt and the emerging markets drowning in excess capacity to produce commodities and industrial goods.

CapEx by the world’s top 40 miners rose from $18 billion in 2001 to $42 billion by 2008, paused during the financial crisis, and then rose to a peak $130 billion in 2013. New projects then halted, but big projects in the pipeline when commodity prices and profit margins began to roll-over in 2012, are being completed due to the sunk cost syndrome: thus on-line capacity continues to soar despite falling prices.

CapEx on oil and gas rose from $100 billion in 2000 to $400 billion in 2008 and to the peak at $700 billion in 2014. Lifting costs even for shale and tar sands are modest compared to the front-end capital investment so the response of production to plunging prices has been limited and will be substantially prolonged.

Steel capacity has doubled from 1.1 billion tons to over 2.3 billion tons during the past 15 years, far outstripping current demand. Excess capacity could easily reach 35%, or more than the combined steel industry of the US, Europe and Japan.

Thompson Reuters reports global CapEx for manufacturing, transport, construction, process industries and utilities rose from $450 billion in 1991 to $700 billion in 2001, a 4.5% annual rate, and to $2.6 trillion in 2013, a 12% annual rate.

Read the full article at http://davidstockmanscontracorner.com/central-banks-have-shot-their-wad-why-the-casino-is-in-for-a-rude-awakening-part-i/?utm_source=wysija&utm_medium=email&utm_campaign=Mailing+List+Sunday+10+AM

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