The U.S. Should Take Notes

Written by Gerardo Del Real
Posted October 28, 2019

The U.S. indices are back at all-time highs, gold remains at/near $1,500 here in the U.S., interest rates are expected to go lower as the Fed meets this week and is largely anticipated to cut a quarter basis point. Everything is awesome! Right?

Why, then, does the Fed continue with capital injections and why do capital injections continue to increase in size?

On October 22, the Fed pumped $99.9 billion in temporary liquidity into the market to ease stresses brought on by a tightening credit market. Two days later, on October 24, the bank upped that to $134 billion.

The official line is that the capital injections are needed to make sure the financial system has enough liquidity. Translation: The financial system does not have enough liquidity and much like the Fed, hasn’t allowed the business cycle to play out. It now appears it has no plans to allow the short-term market to dictate rates freely.

While the major U.S. indices make new record highs, China is quietly making all the moves the U.S. should be making in this record-low-interest environment.

Last week, I told you that the war for the next generation of resources was being won by China.

It’s using those resources to bolster its economy by rapidly increasing the amount of infrastructure spending.

The Chinese government has  doubled the value of large-scale infrastructure projects it has approved so far this year compared with last year.

The National Development and Reform Commission (NDRC) has approved 21 projects, worth at least 764.3 billion yuan (US$107.8 billion), according to the South China Morning Post.

The amount is more than double the size of last year’s 374.3 billion yuan (US$52.8 billion) in approvals recorded over the same period, which included 11 projects such as railways, roads, and airports.

The U.S. should take notes. To make up for lower overall tax revenues due to tax cuts (sound familiar?), Beijing has been allowing local governments to sell more special purpose bonds, whose proceeds can only be used to fund infrastructure projects.

At the beginning of this year, the Ministry of Finance raised the quota for special bonds to 2.15 trillion (US$302 billion) from 1.35 trillion (US$190 billion) last year.

The stimulus is necessary as China’s third-quarter economic growth of 6% is the slowest rate since Beijing began publishing such data in 1992.

Yes, China’s debt has risen to more than US$40 trillion — over 300% of its GDP — but that debt has at the very least provided a return that’s tangible: infrastructure that will last for generations.

China is also winning the investment war in Africa.

According to the 2018 World Investment Report, China invested a total of $45.1 billion in greenfield projects for the 2016-2017 period, up close to $40 billion from the 2013-2014 period. 

Contrast that to the $34.57 billion and the paltry $7.54 billion invested by the EU and the U.S. respectively over the 2016-2017 period. 

In an environment where central banks around the world have a vested interest in expanding the credit cycle, the largest commodity consumer has a vested interest in expanding its economy — specifically through infrastructure spending — which means everyone should once again have an eye on copper.

To your wealth,

gerardo-sig

Gerardo Del Real
Editor, Junior Mining Monthly and Junior Mining Trader.

For the past decade, Gerardo Del Real has worked behind-the-scenes providing research, due diligence and advice to large institutional players, fund managers, newsletter writers and some of the most active high net worth investors in the resource space. Now, he is bringing his extensive experience to the public through Outsider Club, Junior Mining Monthly, and Junior Mining Trader. For more about Gerardo, check out his editor page.

*Follow Outsider Club on Facebook and Twitter.

Investing in Marijuana Without Getting Burned