Interview with Gary Dorsch, editor and publisher of the Global Money Trends newsletter. Gary is a noted commodity analyst and market strategist who worked on the trading floor of the Chicago Mercantile Exchange for nine years as the Chief Financial Futures Analyst for three clearing firms. Log in and visit our Newshour page here or iTunes feed here for full audio.
China Slowdown Causing “Ricochet Effect” Across the Globe
“The United States typically leads the world economy and is the benchmark for the world's stock markets and as goes the US so goes the world markets but, in this particular case, that did not happen. Events from outside of the United States caused the US stock market to drop [and]…a lot of that has to do with the growth to the world's second strongest and leading economy being China. China…has contributed about a third to a half of the world's growth over the last 5 years and all of a sudden that locomotive has been slowing down quite dramatically and there is a ricochet effect from China now that is affecting other parts of Asia, Europe and the United States.”
Four and a Half Year Bear Market in Commodities
“As far as the US is concerned, most of the [China] impact to the downside has to do with weakening in the materials sector and then the energy sector, and this all relates back to the 4.5 year bear market we've seen in commodities, which has been unrelenting and has now started to take a major toll on various parts of the US bond market and stock market. And the bond market I'm referring to would be the high yield junk bond market--about a $1.3 trillion market and quite a bit of that is concentrated in mining companies and in energy companies where we are seeing a massive flight from these junk bonds.”
Major Mining Companies Trading at Junk Levels
“Many famous companies such as Freeport-McMoRan (FCX), US Steel (X) and Peabody Energy (BTU) have seen their bond prices fallen dramatically, their interest rates have gone up to levels where they are now considered to be junk and the high-yield junk bond fund, HYG, has kind of led this market down in my opinion. I think…this all indicates that there is enormous stress in the markets.”
Major Defaults Coming if Commodity Prices Stay Weak
“We're talking about hundreds of billions of dollars that could be potentially defaulted on if commodity prices remain weak. Whereas we all remember that Lehman Brothers defaulted on about $360 billion of debt and preferred stock and that triggered a massive collapse in the world markets, we're looking at something possibly even larger than that. This also now goes even further if we look at the emerging nations, which now make up about 52% of the world economy. Especially those in Latin America--they are all pretty much dependent on commodity exports and we are seeing their currencies dropping quite dramatically… There's about $18 trillion of debt by corporations in the emerging world. Most of that debt is in China but still, as far as emerging companies in Latin America, they are now being pushed to the brink.”
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