Kerr Trading International CEO: China's the Wild Card
By Mike Norman
Mike Norman (Norman): Hey everybody, and welcome back to HardAssetsInvestor.com. I’m Mike Norman, your host. And here today, all the way from Estonia, is the commodity man himself, Kevin Kerr, making a return performance here on the show. Thanks a lot. It’s been a long time.
Kevin Kerr, president, CEO, Kerr Trading International (Kerr): Good to be here, Mike.
Norman: All the way from Estonia.
Kerr: Yes.
Norman: You moved. You left the United States, and you went to Estonia, right?
Kerr: I am officially an expatriate.
Norman: Well, I did that for a period of time. So, from the outside looking in, you're back here now, making the rounds on the media circuit. Just give us sort of the big picture of how you see the economic landscape in the United States and Europe and, of course, your specialty, commodities.
Kerr: You do get a really different perspective when you leave the U.S. and you live abroad, as you know, from doing so. And we’re just seeing crisis everywhere, throughout Western Europe, through Eastern Europe. And now, of course, in the Middle East, this powder keg in Egypt.
Norman: Right.
Kerr: All of these things are affecting commodities. And then, we’ve seen many of these commodities just continue to climb. Some of it defies gravity, in my opinion.
Norman: Because you’ve been bullish on commodities for a long, long time. I mean, we ought to point that out, that you were one of the early bulls on commodities, have been very vocal. You’ve been on this show several times. And now, you're thinking it’s getting a little frothy here?
Kerr: Well, I think certain commodities are. Long term, I do believe commodities will continue to stair-step higher. But we have got to look at things like copper, and even energies right now, up above $90 a barrel for crude. We have plenty of crude on the market right now. We have terrible unemployment throughout the world.
Norman: Right.
Kerr: So really, even though we’re seeing some green shoots, maybe, it’s not enough to be demanding a $90 oil price, or copper at the levels it’s at. Now, I have been wrong the last two years. I have not gotten short copper, but I have always said, it’s time for it to pull back. And yet it continues to proceed on. And I think we have a lot of other factors in the market besides just demand right now.
Norman: Maybe not the physical demand, but I think what you're saying suggests that we see a lot more speculation in the markets. And this is what is driving it. We also know that a lot of these markets, especially agricultural markets, they're small relative to securities markets. So it doesn’t take a whole lot of money to drive them to very high price levels, right?
Kerr: Well, that’s exactly right. And we have all these new participants in these markets that have never been here before. And that’s added to the volatility rather than taken away from it. And so I have to take a step back and say, “Which of these commodities really justifies the prices they are at?” And, even looking at some of the grains – while I think it’s a very strong sector, and will continue to be – you still have to take a look at the soybeans, for example, and say, “Is this price at these levels really justified with the situation we’re at right now in the … ”
Norman: What would be a catalyst, in your opinion? I mean, do we need another economic crash? Or could this just hit a peak sort of on its own, organically?
Kerr: I think it could. We could see a repeat of 2008, maybe even worse, quite frankly.
Norman: You mean a crash?
Kerr: A crash, yes. I think we could. Because the real wild card here is China. And I’m very concerned about China, because everybody hinges all this emerging market growth on China. Of course. We all do. And China has a serious real estate problem right now. They have serious problems. There’s no denying it. That you can see, you can go there, you can walk through the ghost towns.
Norman: In what way? Overbuilding? Excess supply?
Kerr: Absolutely: excess supply, overbuilding. And, on the other front, a lot of their rural community has left to move into these cities or to go into the manufacturing and industrial areas. And so they have no rural population anymore, very little, that can actually do the farming that can feed all these people.
But I think, ultimately, you're looking at a property bubble of immense proportions in China. And something that we just can't predict, if that does burst, what that could do to the rest of the commodities …
Norman: And now they're trying to cool down their inflation.
Kerr: Exactly.
Norman: … which is running around 6 percent. And so they're raising bank reserve requirements and interest rates, trying to engineer the very illusive soft landing. Because usually, it ends up being a hard landing.
Kerr: Right. And a hard landing in China could be disastrous. Look at what’s going on in Egypt. You have class warfare going on. You have people that are not able to feed their families. I’ve heard China has now turned off their Internet. At least I heard that rumor going around. I don’t know if it’s true.
They don’t want the people in China seeing what’s going on in Egypt. That’s true. They do not want that kind of civil unrest in China. It’s not able to be controlled. Really, the concern right now is that that’s going to spread throughout the Middle East where there’s young population out of work, has very little hope for the future. And in China, there’s much of the same problem. So, forget about it; if that spreads to China, that kind of civil unrest could unwind the whole thing.
Norman: But you're saying if that happened, it would be bearish for commodities?
Kerr: I think so, yes.
Norman: I would venture to guess that something like gold would benefit, wouldn’t it?
Kerr: Well, I think certain commodities would benefit, sure. It’d be a flight to quality, certainly, and to gold, safe haven. Fear, which we’re seeing with Egypt, we saw gold spike on that, oil spike on that. But how long these fear trades last really depends on how prolonged the situation is. So it’s hard to say.
Hopefully, that scenario won't take place in China. But, with the real estate situation there, with the population problems there, and with, like you said, the increases in inflation, it’s an uncontrollable dragon. I don’t know what comes next.
Norman: Kevin Kerr, turning a little bit bearish on commodities in this interview. Well, that concludes this part of my interview with Kevin. We will have the second part. But that’s it for now. This is Mike Norman, signing off. See you again next time. Bye-bye.
Mike Norman (Norman): Hey everybody, and welcome back to HardAssetsInvestor.com. I’m Mike Norman, your host. And here today, all the way from Estonia, is the commodity man himself, Kevin Kerr, making a return performance here on the show. Thanks a lot. It’s been a long time.
Kevin Kerr, president, CEO, Kerr Trading International (Kerr): Good to be here, Mike.
Norman: All the way from Estonia.
Kerr: Yes.
Norman: You moved. You left the United States, and you went to Estonia, right?
Kerr: I am officially an expatriate.
Norman: Well, I did that for a period of time. So, from the outside looking in, you're back here now, making the rounds on the media circuit. Just give us sort of the big picture of how you see the economic landscape in the United States and Europe and, of course, your specialty, commodities.
Kerr: You do get a really different perspective when you leave the U.S. and you live abroad, as you know, from doing so. And we’re just seeing crisis everywhere, throughout Western Europe, through Eastern Europe. And now, of course, in the Middle East, this powder keg in Egypt.
Norman: Right.
Kerr: All of these things are affecting commodities. And then, we’ve seen many of these commodities just continue to climb. Some of it defies gravity, in my opinion.
Norman: Because you’ve been bullish on commodities for a long, long time. I mean, we ought to point that out, that you were one of the early bulls on commodities, have been very vocal. You’ve been on this show several times. And now, you're thinking it’s getting a little frothy here?
Kerr: Well, I think certain commodities are. Long term, I do believe commodities will continue to stair-step higher. But we have got to look at things like copper, and even energies right now, up above $90 a barrel for crude. We have plenty of crude on the market right now. We have terrible unemployment throughout the world.
Norman: Right.
Kerr: So really, even though we’re seeing some green shoots, maybe, it’s not enough to be demanding a $90 oil price, or copper at the levels it’s at. Now, I have been wrong the last two years. I have not gotten short copper, but I have always said, it’s time for it to pull back. And yet it continues to proceed on. And I think we have a lot of other factors in the market besides just demand right now.
Norman: Maybe not the physical demand, but I think what you're saying suggests that we see a lot more speculation in the markets. And this is what is driving it. We also know that a lot of these markets, especially agricultural markets, they're small relative to securities markets. So it doesn’t take a whole lot of money to drive them to very high price levels, right?
Kerr: Well, that’s exactly right. And we have all these new participants in these markets that have never been here before. And that’s added to the volatility rather than taken away from it. And so I have to take a step back and say, “Which of these commodities really justifies the prices they are at?” And, even looking at some of the grains – while I think it’s a very strong sector, and will continue to be – you still have to take a look at the soybeans, for example, and say, “Is this price at these levels really justified with the situation we’re at right now in the … ”
Norman: What would be a catalyst, in your opinion? I mean, do we need another economic crash? Or could this just hit a peak sort of on its own, organically?
Kerr: I think it could. We could see a repeat of 2008, maybe even worse, quite frankly.
Norman: You mean a crash?
Kerr: A crash, yes. I think we could. Because the real wild card here is China. And I’m very concerned about China, because everybody hinges all this emerging market growth on China. Of course. We all do. And China has a serious real estate problem right now. They have serious problems. There’s no denying it. That you can see, you can go there, you can walk through the ghost towns.
Norman: In what way? Overbuilding? Excess supply?
Kerr: Absolutely: excess supply, overbuilding. And, on the other front, a lot of their rural community has left to move into these cities or to go into the manufacturing and industrial areas. And so they have no rural population anymore, very little, that can actually do the farming that can feed all these people.
But I think, ultimately, you're looking at a property bubble of immense proportions in China. And something that we just can't predict, if that does burst, what that could do to the rest of the commodities …
Norman: And now they're trying to cool down their inflation.
Kerr: Exactly.
Norman: … which is running around 6 percent. And so they're raising bank reserve requirements and interest rates, trying to engineer the very illusive soft landing. Because usually, it ends up being a hard landing.
Kerr: Right. And a hard landing in China could be disastrous. Look at what’s going on in Egypt. You have class warfare going on. You have people that are not able to feed their families. I’ve heard China has now turned off their Internet. At least I heard that rumor going around. I don’t know if it’s true.
They don’t want the people in China seeing what’s going on in Egypt. That’s true. They do not want that kind of civil unrest in China. It’s not able to be controlled. Really, the concern right now is that that’s going to spread throughout the Middle East where there’s young population out of work, has very little hope for the future. And in China, there’s much of the same problem. So, forget about it; if that spreads to China, that kind of civil unrest could unwind the whole thing.
Norman: But you're saying if that happened, it would be bearish for commodities?
Kerr: I think so, yes.
Norman: I would venture to guess that something like gold would benefit, wouldn’t it?
Kerr: Well, I think certain commodities would benefit, sure. It’d be a flight to quality, certainly, and to gold, safe haven. Fear, which we’re seeing with Egypt, we saw gold spike on that, oil spike on that. But how long these fear trades last really depends on how prolonged the situation is. So it’s hard to say.
Hopefully, that scenario won't take place in China. But, with the real estate situation there, with the population problems there, and with, like you said, the increases in inflation, it’s an uncontrollable dragon. I don’t know what comes next.
Norman: Kevin Kerr, turning a little bit bearish on commodities in this interview. Well, that concludes this part of my interview with Kevin. We will have the second part. But that’s it for now. This is Mike Norman, signing off. See you again next time. Bye-bye.
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