a reply to a reader comment

I spent a lot of time over the weekend thinking about how to reply to a comment from an astute regular reader about my post on Friday.

Here it is (edited slightly):

Thanks for your comment, Chris.

I agree completely with most of what you say. I think the US stayed with easy money for far too long.  As you point out, we’ll find out how damaging the speculative excess this has spawned has been as rates begin to rise. At the same time, the internet has changed the dynamics of ownership of physical assets. The aging of the population plus the unwillingness/inability of homeowners to use the equity in their houses to fund current spending will also be drags on consumption in the US. And, despite our warts, we’ve come out of the big recession in better shape than the rest of the developed world. So we now face a complex, slow-growth world with lots of challenges for stock and bond markets.

As to mining commodities, though, I continue to think that they exist in their own boom-bust worlds whose main feature is that participants will add capacity, even though history has shown that this will destroy pricing, so long as they have positive cash flow and can get bank loans. Oil and gas are a little more complicated, but let’s ignore that. The ensuing slumps can last a decade or more. It’s the odd nature of these industries that they produce more when prices decline rather than less. I regard the current weakness in the prices of mining commodities as resulting from industry weirdness rather than a recession-induced falloff in demand.

Of course, this is an optimistic viewpoint and I’m an optimist, so I could easily be wrong.

Does it make a difference whether oil and iron ore price declines are harbingers of general economic weakness or are just playing out a new day in their Groundhog Day existences?

I think it does.

If I’m correct, then mining weakness–and the “lost decade” it seems to predict for countries radically dependent on mineral production, although important, is one of many entries to the list of transformational issues facing today’s world. That list includes:

–Millennials vs. Baby Boomers
–China’s emergence as the world’s biggest economy
–the disruptive power of the internet
–political reaction to the failure of the governments of the US, EU and Japan to enact appropriate fiscal policy, defending entrenched special interests (many of them on the wrong side of change) instead.

In the world I envision for 2016, stocks will go basically sideways.  It will be hard to make money by owning them, but with careful selection it’s possible.

If, on the other hand, if you’re right that mining commodity price weakness foreshadows global economic contraction that just hasn’t hit mainstream indicators yet, then my take is much too positive. Cash will be the best place to be.