exits

http://www.zerohedge.com/news/2015-12-31/now-comes-great-unwind-how-evaporating-commodity-wealth-will-slam-casino

The giant credit fueled boom of the last 20 years has deformed the global economy in ways that are both visible and less visible. As to the former, it only needs be pointed out that an economy based on actual savings from real production and income and a modicum of financial market discipline would not build 65 million empty apartment units based on the theory that their price will rise forever as long as they remain unoccupied!

As we have regularly insisted, there is nothing in previous financial history like the $185 trillion of worldwide credit expansion over the last two decades. When this central bank fueled credit bubble finally reached its apogee in the past year or so, global credit had expanded by nearly 4X the gain in worldwide GDP.

Moreover, no small part of the latter was simply the pass-through into the Keynesian-style GDP accounting ledgers of fixed asset investment (spending) that is destined to become a write-off or public sector white elephant (wealth destruction) in the years ahead.

Global demand for natural rubber, used mostly in tires, is slowing as the economy cools in China, the world’s largest buyer of new cars. Supplies are expanding after a decade-long rally in prices to a record in 2011 encouraged top producers like Thailand, Indonesia and Vietnam to plant more trees. Output will exceed use for two more years, with the surplus quadrupling in 2016, according to The Rubber Economist Ltd., a London-based industry researcher.

……Rubber traded in Tokyo, a global benchmark, has tumbled 70 percent from a record in 2011, touching a six-year low of 153 yen ($1.26) a kilogram on Nov. 6. Futures in Shanghai have slumped 22 percent in 2015. The export price from Thailand, the top producer, is down 23 percent…..

Global production is set to exceed demand by 411,000 metric tons next year and by 430,000 tons in 2017, compared with a surplus of 98,000 tons in 2015, The Rubber Economist predicted on Dec. 9. Output will increase 3.8 percent next year to 13 million tons and will keep expanding through 2018, the researcher said. Consumption won’t grow nearly as fast, which will leave stockpiles by the end of 2017 at a record 3.7 million tons, said Prachaya Jumpasut, managing director of The Rubber Economist.

So with producer profits and incomes falling in commodity sectors and capital goods industries all over the world, there is no prospect of a smooth rotation into more services and consumption. Deflation means not just lower oil or steel prices; it also means the evaporation of production and incomes which were falsely inflated by the 20-year credit binge.

And that’s not the half of it. The massive windfalls on commodities and capital goods earned by producers during the great credit inflation were not entirely reinvested in new capacity and fixed assets. As the Wall Street Journal documented recently, it also enabled a huge increase in the balance sheets of sovereign wealth funds due to state ownership or heavy taxation of oil and mineral production.

But now the days of heady accumulation of “sovereign wealth” in Saudi Arabia, Norway, Kazakhstan and dozens of commodity producers in between is over and done. What is happening is that these funds are entering a cycle of liquidation which is unprecedented in financial history.

Indeed, the data for Saudi Arabia, Qatar, Kuwait, the UAE and other members of the Gulf Cooperation Council (GCC) is stunning. During the global credit boom they amassed sovereign wealth funds totaling $2.3 trillion. But with deficits now estimated at 13% of GDP and rising, the level of asset liquidation is soaring.

Thus, if crude oil prices recover to $56 per barrel next year, the GCC states will need to liquidate $208 billion of investments. Yet if prices fall to $20 per barrel, as Goldman Sachs has warned, they would need to liquidate nearly $500 billion of their booty in a single year.

But regardless of the exact crude oil path in the years ahead, prices are sure to stay in the sub-basement for an extended period. That means that the GCC states may need to liquidate the entirety of their sovereign wealth funds by early in the next decade.