The theme of commodity deflation is really becoming the overwhelming signpost for investors today and is getting almost entirely overlooked. In the past week, we've seen five-year lows in copper and gold and the beginnings of the double-dip recession in oil that I have been predicting for weeks.
The reason you must be aware of the completeness of the current commodity meltdown is one of historical precedent and economic laws. The most important precedent is that commodity deflation has never not been accompanied by a concurrent disaster in other capital markets; whether we call this the retreat from "risk-on," or a real recessionary signpost, this is usually a strong canary in the coal mine that things are going to get rough.
And even though there's been a drubbing this year in the grains as well as the metals and certainly oil and natural gas, the one positive that may be found is that this particular deflationary cycle in metals has been going on for quite a long time.
Still, we'd not like to have been out of the stock market for the past five years, would we? No, in this case, "Doctor Copper" has had a very, very premature diagnosis of ill health, one we were very right to ignore.
But still, the continued drop in metals and the coming secondary drop in oil are worrying. We can rationalize both in the very suspicious growth figures that have been imputed by the Chinese. We now are all very skeptical of the continued claims for 7% growth this year. In both copper and oil, the Chinese have taken in almost the entirety of both surpluses. The drop in prices in 2015 has seen imported barrels into China go immediately into storage, while we know how deeply the shadow banking world runs on copper supply.
But storage is limited even in China, and a real GDP number of 5% or less will constrain capital, even in China.
In oil and oil stocks, this implies -- yet again -- that the oil bust is not going to be a short-lived one. Even though I finally am finding value again in some shares of U.S. independents, particularly Chesapeake Energy (CHK), Hess (HES) and Continental Resources (CLR), I have no doubts that the cycle will overdo on the downside as it always has overdone on the upside. Have another look at that five-year copper chart and tell me you're ready to decide where to buy a mining stock of any kind. I'll tell you you've got more courage than I.
But, for those looking for something to do during this downswing, let me suggest Williams Companies (WMB). After turning down a bid from Energy Transfer Equity (ETE) last month of $64 a share, it again is trading at $54. The value is still there in unique pipelines routes, and ETE -- or someone else -- will be back. At $50 a share, you can take a small 3% dividend and wait for the next offer.