Over at Pragmatic Capitalism, Cullen Roche has one of his trademark, must-read “Three Things I Think I Think” posts, one of which is that commodities and China can’t both be right now.
He posts this chart showing the diverging ways of the Shanghai Composite and the CRB Commodity Index.
The divergence is certainly interesting, and he writes:
If I had to pick a poison I would likely be more inclined to side with the insiders that trade the Shanghai composite as opposed to the gamblers in the commodities pits who are betting on perpetual elevation in commodity prices….
The key question is: how well do you believe what the Shanghai market is telling you? Remember that in 2010 Shanghai had pretty bad performance, but China’s actual economy grew like gangbusters. And of course it’s the real economy that matters for commodities.
Last year Michael Pettis wrote a pretty persuasive article arguing that the Shanghai market doesn’t really reflect anything very well given the narrow investor base, lack of transparency, government intervention, and the dominance of speculators.
The bottom line: China really matters for commodities. It’s not obvious that stocks are telling us that, although given the tightening bias in China, there may still be plenty of reason to be fearful.
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