(This is Part 2 in a three-part series by Jim Cramer. To read Part 1 click here.)
3. China has to become a more positive force in the world. Or, to put it another way, China has to clean up its act with the government becoming more transparent and the stock market more stable. Right now, the Chinese Communist government is, empirically, judging by traditional commodity inputs, doing nothing meaningful to stimulate the economy or avoid a recession. Meanwhile, all attempts to make the service economy generate wealth are being undone by the immature and rank amateurism of the officials who are trying to manage the stock market. It is time for the Chinese to recognize that they created a bubble of massive proportions by allowing easy margin credit and a plethora of accounts opened by individuals. The Chinese have done to stocks what the U.S. did with housing circa 2005. Until the bubble is officially burst and the Shanghai index gives up 33% of its gains to return to where it was in 2014, before the bubble began, the Chinese stock market is not to be trusted.
The phony Shanghai 3000 line in the sand has no bearing whatsoever and is totally a function of restricted selling and central bank and related-entity buying, something that is eating up the reserves of the country. Sure, the currency may be too high, but that can be disentangled from the stock market. One look at the individual stocks in the index tells you the absurdity of the index's current, inflated price. Many of these companies look like dotcom companies in our country circa 2000. Let them float free using rules developed by the SEC regarding insider sales -- they are severely restricted -- and let the chips fall, even if it means damaging the wealth of about a twelfth of the country's people, damaging the budding wealth from the service economy. Only then will both bargains -- even to western investors -- and credibility be restored and we can cease focusing on a stock market that had no real relevancy to us for years and years.
4. We need to see commodities bottom -- all commodities. The persistent deflation among commodities has led for imbalances that derail any attempts to stabilize whole countries, not just stock markets. We know, for example, that copper, tin, iron and aluminum remain in freefall because China, the marginal buyer of all of these goods for so long, is no longer taking in commodities of any size. We know this by watching the Baltic Freight index retreat to absurd levels below 500, demonstrating a severe decline to what has to be considered recessionary levels for China itself. Get used to China being said to be in recession. I believe it is. The fallout from the end-of-the-commodities-demand story is decimating whole companies that produce or abet the production of those commodities -- think everyone from Caterpillar (CAT) to U.S. Steel (X) to Brazil and Indonesia and we cannot invest in this environment. We must be concerned about everything from too many countries failing to too many companies, including large outfits like Glencore (GLNCY) or Freeport-McMoRan (FCX) or Vale (VALE) and Petrobras (PBR).
5. We need to see oil -- among other key commodities -- stop going down at some level and in some time. My oil and gas expert, Rusty Braziel of RBN, has written a remarkable book, "The Domino Effect," which makes it clear that oil could go down to levels hitherto not thought about if the current situation doesn't abate. He thinks that the Saudis miscalculated and thought the marginal producers in the U.S. would have stopped or slowed production right now given how low the Saudis have taken the prices with wildly over-aggressive oil pumping. That turned out not to be the case as banks forgave lots of domestic customers, raw costs to drill went down, technology allowed for cheaper wells to be drilled and production has only now started to peak, something that pretty much every single prognosticator, especially those who run oil companies, did not think would happen. Brazil pretty much pioneered the lower-longer thesis that oil prices would stay low for a longer time and threw cold water on any of the letters (the U bottom, the V bottom or the W bottom). He is also quick to criticize those who foresee any big rebound in 2016, including Boone Pickens. A return to the $50 level, let alone the $70 level, seems pretty far-fetched to Rusty.
That means many bankruptcies and reorganizations must occur in 2016 because many of these companies, from Petrobras to Freeport-McMoRan and a host of smaller players run out of capital and may have a hard time paying their debts out of depleted cash flows. We have way too many oil pipelines in the country and the master limited partnership woes must stop and the bleeding be staunched among the independent oil and gas companies, every one of which would do well to raise capital, making their equities un-investible until they do. It all comes due in 2016 if oil doesn't stop going down and I don't think it will without some important Mideast geopolitical event occurring. Needless to say, the entire fossil fuel complex is under financial attack, so there should be many more failures in that cohort before the entire market can stabilize, although certain non-fossil-fuel companies, as well as consumers, might prosper. But the positives do not matter now.
6. Speaking of geopolitical events, I think that the world seems very unstable right now. North Korea is doing more than just saber-rattling. China seems to want to provoke a naval incident with the United States. Saudi Arabia has broken off ties with Iran at a time when our nation seems closer to Iran than the Saudis, despite the flaunting of Iranian nuclear ambitions right in our faces. Brazil seems like it could topple and repudiate its debts. The fight between the West and Russia has not been resolved, putting a damper on any return to growth from either region. Terrorism, as seen through the catalyst of ISIS, is on the rise and not showing any sign of peaking. Britain is debating pulling out of the EU. The immigrant crisis in Europe is nowhere near resolution, but the key leader, the much revered Chancellor Angela Merkel, is not offering any sort of major program to help integrate these refugees, a program that could stimulate European growth. There are armed conflicts going on like the Saudi-Yemen war that aren't even being covered. Iraq and Afghanistan, after years of war, seem to be in flux and headed toward anti-American status. This is not a world in which you feel like investing.