To some, China's $150 billion infrastructure-focused stimulus package announced last week may appear relatively modest in scale. At more than 25% of the monumental $586 billion package that China launched in the wake of the 2008 Lehman Brothers implosion, however, this is nonetheless a very major development for a commodity sector that's been teetering on the edge of oblivion.
But what if that $150 billion dose of industrial demand creation turned out to be just a drop in the bucket of a looming worldwide blitz of easy fiscal and monetary policy destined to drive nominal commodity prices substantially higher? I believe that's precisely where we stand today, and that's why I've sung the praises of embattled commodity producers like Teck Resources (NYSE: TCK) throughout this harsh market correction and doubled down on my long-standing position in shares of Peabody Energy (NYSE: BTU).
China's $1.1 trillion stimulus blitz
For starters, let us please take ample notice of the fact that several of China's prominent cities have hatched their own separate plans for infrastructure and industrial-development initiatives, which, if realized in full, would bring total investments to $1.1 trillion over the next several years. Incredibly, China's emerging megacities of Changqing and Tianjin have each proposed their own multiyear spending initiatives totaling roughly $240 billion apiece!
Because it's not yet clear how those and other ambitious municipal proposals will be funded, investors will wish to temper their specific expectations accordingly, but the important takeaway here remains that China has sprung into action to thwart its recent slowdown with another massive program of public investment. And if even a fraction those municipal proposals come to fruition, this latest round of stimulus could prove just as substantial as the first. Nearly four years ago, I interpreted China's prior stimulus push as the likely catalyst for a major reversal within the commodity cycle, and I initiated my silverminer CAPS portfolio at the time. Just six months later, I closed my bullish CAPScall for Aluminum Corporation of China (NYSE: ACH) with a cozy 192% gain. Even if this latest stimulus push yields a more subdued rally than the last go-around, I believe this latest initiative yields an investment climate for commodities characterized by very limited downside risk and some rather potent upside potential.
Addressing a Pan-Asian economic summit over the weekend, President Hu Jintao pledged to "leverage the role of infrastructure in boosting domestic demand, creating jobs, and improving people's livelihood." That pledge was music to the ears of Caterpillar's head of China operations, Richard Lavin, who delighted: "He talked about roads, bridges, airports, sewage systems, energy -- all of these are areas that we play in; it's the core of our business."
The global infrastructure imperative
While China and its pan-Asian neighbors rightfully dominate discussions of the outlook for commodities, it's worth pointing out that China is not exactly alone in reacting to a deteriorating growth outlook. We face a global threat of recessionary malaise as Europe and the United States each grapple with persistent debt distress and truly anemic growth rates. Monetary easing is already returning to the fore, with European Central Bank chief Mario Draghi's proposal for an unlimited bond-buying program garnering widespread report, and growing consensus around the utter inevitability of additional quantitative easing by the U.S. Federal Reserve. By themselves, even in the absence of any accompanying fiscal stimulus, these sorts of monetary interventions have profound impacts upon commodity prices over time. I have found substantial shelter from easy monetary policy thus far through investment exposure to the precious metals over the past several years, but in fact the entire commodity complex is prone to powerful upward price adjustments as a consequence of central bank intervention.
Finally, permit me to point out that China is not the only major economy that's likely to kill two birds with one stone by focusing further efforts at fiscal stimulus around the imperative of infrastructure investment. U.S. steelmaker Nucor (NYSE: NUE) has already moved decisively into position to facilitate some portion of an estimated need for roughly $2 trillion in U.S. infrastructure spending. Driven in part by powerful demographic trends that show no signs of abating in the face of global economic malaise, the apparent inevitability of substantial investments in infrastructure by emerging economies like India and Brazil offers investors further comfort as they dig through the decimated stocks of commodity producers to find their diamonds in the rough. But you don't have to dig alone, so please join my ongoing discussions of the commodity complex by bookmarking my article list or following me on Twitter.
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