The dog fight between Thailand’s Marc Faber and Singapore’s Jim Rogers is on. The point of contention is: Which way will commodities prices go now that China’s (NYSEARCA:FXI) bubble economy appears to be headed for some sort of economic slowdown, contraction or crash? “Well if we define a bubble as a period of excessive growth and artificially low interest rates, then China had a huge bubble,” Faber told King World News on Wednesday, reiterating his previous calls for a China economic hard landing. “Usually bubbles are not deflated by a soft landing, but by a hard landing and this concerns me, actually, much more than the European situation.”
If China’s rapid growth slows “meaningfully” or crashes, “it will have a huge impact on the demand from China for raw materials, for commodities,” according to Faber, which “will impact Australia, Africa, the Middle-East and Latin America” and could create a “vicious spiral on the downside” to one of the only few outperforming sectors of the world economy—commodities.
The pony-tailed Swiss money manager and 20-year+ resident of Thailand isn’t alone with his grim outlook for China and commodities prices. Echoing concerns about the implications to commodities prices from a possible China crackup have been expressed by Eclectica Asset Management’s CIO Hugh Hendry and Kynikos Associate’s President and Founder Jim Chanos, two additional and respected minds on the subject of China.
Hendry, who attended a December 2010 investor conference in Russia, which incidentally was chaired by Faber, said, “There should be a Confucius saying ‘Thou shall not invest in overcapacity.’” Hendry went on to emphasis that he’s suspicious of China’s growth rate after factoring out it’s behemoth ‘manufactured’ capital spending component, a component which can be directly tied to Beijing’s centrally planned projects.
Chanos agrees with Faber and the fears of a hard landing to the Chinese economy. Chanos told Bloomberg on two recent occasions, on Oct. 28 and Nov. 24, the real estate bubble has popped and the banking crisis that is most likely to result from drop in real estate prices may rival the financial crisis in the West.
“The Chinese are beginning to realize that property prices can go down as well as up and this is going to be a very, very troubling development for the Chinese property market,” he said, and will lead to a “hard landing” in China.
“Most China observers were not talking about any landing three months ago and now they are confidently talking about a soft landing,” he added.
Pundits to the Chinese hard landing scenario, including Jim Rogers of Rogers Holdings, in particular, took a swipe at Faber on Friday in an email to CNBC regarding Faber’s take on commodities as an investment.
“Marc still does not understand China,” stated Rogers. “There are going to be several hard landings in the next few years, but China’s will be less hard overall than others such as Greece, U.S., et al,” and added that he believes China’s economy will undergo some busts in some sectors but will be offset by booms in other sectors.
According to Bloomberg, Rogers continued his email with references to two great bull markets of the recent past, one in stocks from 1983 to 1999 and the other bull market in gold from 1971 to 1980, that underwent steep consolidations such as the one commodities have been going through today before resuming their climbs.
After stocks took a drubbing during the 1987 crash, the bull market in equities continued for another 12 years, returning approximately 725 percent from the lows of the crash.
Rogers also cited the super bull market for gold (NYSEARCA:GLD), which crashed in price by 50 percent in 1974 following a six-fold move in the price of the yellow metal to $200 from its pegged price of $35 per the ounce in 1971. After reaching as low as nearly $100 following the crash, the gold price continued its bull market with a 750 percent gain during that six-year period.
“Corrections are the normal way of all markets,” stated Rogers, and remains bullish in all commodities, especially silver (NYSEARCA:SLV) and rice in the shorter term.
Roger’s thesis on the outlook for China, with its enormous appetite for commodities during this decade and expectation to continue for at least another decade, has a strong advocate in Steven Leeb, a researcher and author of several financial books on the subject of bull markets, whose new book, Red Alert: How China’s Growing Prosperity Threatens the American Way of Life discusses this very issue.
When asked about Chanos’ point (adopted by Faber), specifically, about China and his expectations for weak commodities prices and a possible end to the bull market in ‘things’, Leeb told Financial Sense Newshour’s James Puplava that China’s overcapacity is quite intentional and part of a much bigger plan being implemented by Beijing’s hierarchy, a plan that includes building out capacity now in anticipation of the global demand for alternative energy products it sees later in the decade.
China intends to dominate the world in the production of alternative energy technologies and products, according to Leeb, adding that China has been “eating our [America's] lunch” in the competition to gain control of the world’s mega-trillion dollar market—clean energy products, specifically products which utilize the sun and wind.
And according to Leeb, the amount of raw materials China will need to roll out its alternative energy industry will be simply “enormous.”
“It’s the height of arrogance for Americans to look at China and say they’re doing things wrong,” said Leeb, referring to conclusions drawn about the Chinese economy by Chanos’, directly.
“There’s no doubt there was a real estate bubble there, but they’ve gained control of it. People tend to view China . . . through the same lens as they do America; they do it through this kind of monetary lens, through this money lens,” Leeb explained. “China’s not like that . . . they don’t think in terms of minute to minute trading bonds day to day. They think in terms of 10 to 20 year increments.”
Leeb gives an example of China’s impact upon the solar industry, citing the demise of one of America’s darling solar stocks, Evergreen Solar (ESLRQ.PK) as a prime example of what happens to companies which stand in the way of Beijing’s plans to dominate the alternative energy market.
“This [Evergreen Solar] was the bellwether solar company, no fraud, no nothing,” Leeb said. “A few years ago the stock traded at $120, now it’s trading at 3 cents. And it’s trading at 3 cents because the Chinese have underbid, they’ve under-priced.
“No one can stay in business. These companies are not competing against other companies; they’re competing against a country that has over $3 trillion in reserves. They are competing directly against China.”
Leeb ends his point about the misconceptions of Westerners regarding the Chinese social, political and economic model by referencing a passage from one of the books authored by former Secretary of State Henry Kissinger.
“There’s that very famous page in Kissinger’s book, I think, on China, in which Kissinger asked Zhou Enlai, who was the former leader of China, do you think the French Revolution was a success? And Zhou Enlia, after thinking about it for minute said, ‘You know, I think it’s too soon to say.’”