Investors are presented with the best opportunity to short resources stocks since 2012 because China's stimulus is finite and demand for raw materials will collapse without it.
Australian Atul Lele, the Bahamas-based chief investment officer of private wealth manager Deltec, says all monetary and fiscal stimulus has a natural conclusion – "it just ends" – and traditional indicators of commodity prices such as global growth and liquidity conditions have been outrun by prices already.
![Atul Lele: Monetary stimulus has a natural conclusion.](/web/20161222183008im_/http://www.smh.com.au/content/dam/images/1/4/1/7/o/o/image.related.articleLeadwide.620x349.gtdw72.png/1482239589457.jpg)
"Right now, commodity prices are consistent with 8 per cent global industrial production. If we saw that, ex of the financial crisis recovery, it would be the strongest rate of global industrial production growth since 1981, at least. Now I'm bullish global growth and more bullish than most people, but it's not going to happen and even if it does happen, all you've done is justify current commodity prices. So why would you buy a resource stock now?"
Commodities prices are also inferring that the US dollar declines by 15 per cent year on year, but the higher dollar is negative for commodities because emerging markets have rely on cheap US dollar funding for growth. The US Federal Reserve has "already tightened twice and they've told us they're going to tighten more aggressively than we previously thought", Mr Lele said, on a visit to Sydney last week.
"Resources have rallied a lot, stimulus has come in, but how are they tracking versus how they did in the 2009 stimulus package? Because the thing is, it comes in and then it has a natural end. If you can work out where we are on the track to that end life, you can work out how much longer the benefits of Chinese stimulus will positively impact commodities and resources companies," he said.
The rate of growth on projects started is also the highest since 2009 on an economy that's roughly 50 per cent larger than it was seven years ago. China consumes 40 per cent of the world's copper.
Problems afoot
When the first package was deployed in 2009 it sent property prices rallying for 12 months. "We're about three months away from the peak in property prices," Mr Lele said.
A downturn in property prices would have a negative wealth effect. "We're about to see property prices roll over. When that rolls over you've got a problem," recalling the property market of 2014.
However, iron ore traded above $US80 a tonne last week, still a long way from 2009 highs. "That's interesting, but we know we've got different base effects and a huge difference in supply," he explains. "Iron ore inventories are actually tracking above where they were in 2009 because we've got more supply that can easily come on board."
Looking at the share price of Brazil's Vale or Australia's BHP Billiton, he argues they have both overshot. "Vale has basically gone up way more than it should have based on stimulus impacts. BHP is the same." He is unable to reconcile the bullish sentiment towards resources stocks with the experience of the last cyclical decline.
"Don't say that resources are a value play because they're absolutely not. I don't care how much value they represent, if commodity prices go down, resource stocks are going down," he said. "Yes stimulus is good, but the point is we've already priced all the stimulus in, and then some.
"So unless we see more stimulus to justify where we are now we've got a problem, and if stimulus gets curbed, as it does, we've got a big problem."
Commodity prices have also benefited from the global reflation trade which followed Donald Trump's election and the expectation he will rebuild infrastructure. Mr Lele notes that most spending of that nature is done at the state level rather than the federal level in the US.