S&P 500 Materials and Industrial Commodity Prices 2005-2015

The crowd has been fleeing commodities since last year and continues to do so. My contrarian instincts are on full alert. However, I’m hard pressed to make the case for a sufficient pickup in global economic growth to advise going against the crowd.

China’s “Silk Road” project is a possible global growth booster. Yale Professor Valerie Hansen, who wrote a 2012 book titled The Silk Road: A New History, discusses the implications of this project in a 7/17 The Indian Express article titled “What the Silk Road means today.” She wrote:

The Silk Road initiative announced by Chinese President Xi Jinping in 2013 and implemented, beginning this year, contemplates so vast an investment in highways, ports and railways that it will transform the ancient Silk Road into a ribbon of gold for the surrounding countries. Officially called ‘The Silk Road Economic Belt and the 21st Century Maritime Silk Road’, the project also has the shorter title, ‘One Belt, One Road.'

The professor concludes with a warning:

When the Chinese proclaim the One Belt, One Road as a win-win policy, more careful analysts will see this as yet another attempt to increase Chinese influence around the world. The Silk Road initiative is aptly named. Just as China used the Silk Road to expand its sphere of influence in the past, it is doing exactly the same thing now.

The question is: How will this ambitious project get financed? The recent stock market rout must be a setback since the Chinese government was certainly counting on the equity capital markets for funding. That helps to explain why Chinese authorities have been scrambling to end the rout and restore the bull market.

Chinese officials are obviously counting on kicking their can down the Silk Road. They desperately need a new source of growth to replace their export-led model. They hope that by building more infrastructure along the road, they’ll reduce the excess capacity of all the infrastructure they built at home. While we are waiting to see how it all plays out, commodity prices continue to signal that there remain lots of gluts.

The ratio of the S&P 500 Materials sector to the is down to the lowest reading since November 9, 2005. It is highly correlated with the CRB raw industrials spot price index, which is also falling and is now down to its lowest level since November 12, 2009. The is inversely correlated with the trade-weighted , which is up 16% since July 1, 2014.

Today's Morning Briefing: Reaching for Growth (RFG). (1) Reaching for yield vs. growth. (2) The most hated asset class is due for a bounce at least. (3) Investment strategist Yellen was right about RFY, wrong about RFG. (4) Reversal of fortune for Utilities, and bonds. (5) The growth-is-scarce scare. (6) No shortage of commodity gluts. (7) China aiming to kick some big cans down the Silk Road. (8) Strengthening dollar once again depressing commodity prices. (9) Is just another commodity, or a pet rock? (10) Did Opie ever really kick the can down the road? (11) Focus on market-weight-rated S&P 500 Energy industries.