China, Brazil and Commdities
This entry was posted on 8/19/2009 10:35 AM and is filed under uncategorized.
As I have written before China is a relationship based system. The market is based on government pronouncements. The stimulus was caused by a wall of money from banks, which was misallocated, because it was assigned by the government through the banks to state owned businesses and local governments. Some went into the stock market and real estate markets. A lot was used to stockpile commodities. That is where Brazil comes in.
Brazil has had a higher percentage of exports of commodities to China and it has recently boosted its trade. Since we are far from high growth, the demand for commodities over the past few months has been driven by China. As China pulls back, so will the demand for Brazilian commodities.
Without the American consumer, the demand for consumption of Chinese goods will fall off and China will experience slower growth. Also look for massive dumping. And the complaints to the WTO are not coming from the US. The big filers are places like India and even Latin America.
I point out that all of my pronouncements have been correct. Look also for growing toxic assets within the Brazilian banking system. I have predicted this for months and the dominoes continue to fall. First Russia, then the Gulf, now Nigeria. The next will be China and Brazil. I can't confirm it. I do know they are there. It is typical of a state dominated financial sector. In Russia the state owned Sberbank has just been hit by a $180 mm embezzlement scheme. In China it was $780 million for I believe CCB.
During booms all banks make bad decisions. As Buffet says, you get to see who is naked when the tide goes out. Brazil has been exceptionally lucky that the Chinese stimulus package kept commodities afloat while all other economies where collapsing. But as the Chinese economy deteriorates so will the economy of Brazil and with it bank loans.
It has to do with information. Information has value. It is disclosed only for money or because of a legal disincentive. The conflict of interest between the state as enforcer of the legal disincentive and the owner of the bank will be decided in favor of the bank. So the state will cover it up as long as possible. There aren't any stress tests that I know of. Trust me. They are there.
The Chinese have put a $1.2 trillion loan band aid on the problem but it won't stop the hemorrhaging because American buyers are not going to pick up the demand and the Chinese cannot change their legal environment fast enough to increase their own demand from 35%. So the growth in the US will be slow but steady. While the economies of many EMs East Asia and commodities producers (ex India) will flounder.
Eventually the US market will recover as capital is reallocated to more efficient firms. Without an efficient legal system in EMs that cannot happen. The banks will never get rid of their toxic assets. Toxic assets a can only go if there is a way to collect collateral through foreclosure or bankruptcy. These do not exist in many EMs
