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Thread: weekend commentary - what 'Doctor Copper' is telling us

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    Default weekend commentary - what 'Doctor Copper' is telling us

    Not wanting to let the weekend posting tradition die, I spent many hours searching out a non-politically connected topic of major economic importance ...

    from our 'old friend' international analyst Gonzalo Lira at


    (snip)"copper is what has me worried.

    Copper fell from $4.20 to $3.25—close to 25%—in about three weeks. Most of that tumble has happened in the last ten days, and what’s worrisome is that, as I write these words over the weekend, there is every indication that copper will continue its free fall come Monday.

    From the numbers that I’m seeing—and from the historical fact that copper tends to fall roughly 40% from peak to trough during an American recession—there is every indication that copper could reach $2.67 in short order. And even bottom out below that—say at $2.20—before stabilizing around the $2.67 level.

    But we’ll see. The price of copper is not the point of this discussion. The point of this discussion is what the price of copper means.

    What it means for monetary policy.

    We all know the old saying: “Copper is the only commodity with a Ph.D. in economics”, or words to the effect.

    The ongoing price collapse of copper signals that the markets have collectively decided that there is going to be no resurgence of the global economies—at least not for the next 9 to 18 months. Up until now, the economic data that has been coming out over the last couple of weeks seemed to indicate that there’s going to be a double-dip—but in my mind, this fall in the price of copper confirms this notion that the general economy is going down.

    And remember: Market sentiment can not only be a predictor of future economic performance, but its determinant. If today the markets feel that the economy is going to suck tomorrow, often that very sentiment is what makes the economy suck canal water.
    So if copper is falling like a mo-fo—which both signals and convinces the market that the economy is gonna suck—what does this mean for monetary policy?

    Prima facie, the fall in the price of copper is deflationary: Less demand means that the prices fall—meaning the dollar acquires purchasing power.

    What does it mean for monetary policy that copper has fallen so low?

    It means that Bernanke will carry out more “non-traditional” Federal Reserve stimulus.

    Ben Bernanke is famous for being terrified of deflation—and to his particular mindset, this is a reasonable fear. More to the point, Bernanke’s deflation-phobia actually matters—because after all, he is the Chairman of the Federal Reserve. He controls U.S. monetary policy.

    Deflation is supposed to be bad because it shrinks an economy. (Personally, I am more afraid of inflation than deflation: The latter is self-correcting, while the former spirals out of control and into social chaos. But that’s for some other post.)

    According to the deflationary world view, falling prices oblige producers to cut back on production—which means firing workers. These fired workers—husbanding their resources during their unemployment—spend less, further contracting demand, thus putting more downward pressure on prices, forcing more producers to cut back and fire even more workers, who thus spend less—

    —you get the picture: A “deflationary death spiral”, in the Deflationistas’ parlance.

    This is Bernanke’s fear—and he will do anything to alleviate it. Notice: It’s not that Bernanke will do anything to alleviate deflation—he will do anything to alleviate his fear of deflation.

    As copper prices continue to tumble, signaling further economic contraction, there is no question in my mind that Ben Bernanke and his Fools of the Fed will view this as evidence of looming dollar deflation.

    They will do everything to stop this looming deflation. But since the “traditional” Federal Reserve tools have been used up—that is, the Fed has its rate at zero, and for all intents and purposes all of its liquidity windows open—Bernanke will have no choice but to announce some new “non-traditional” liquidity injection scheme shortly.

    Thus I expect some Banana Republic money-printing scheme to be announced by the Bernankster before the end of the year—perhaps as early as this coming October. The fall in the price of copper—more than anything else—is what Benny and his Fools will be looking at, to justify this new scheme.

    And my bet is, this scheme they announce will be as big—and as controversial—as QE-II. "(snip)


    For anyone not familiar, the famous 'Doctor Copper' corrolary is related to the historical fact that copper metal is a basic component of damn near everything from housing to autos to computers to durable goods. As such, a decline in the demand for copper 'today' has historically indicated a decline in production of housing and autos and computers and durable goods 'tomorrow' i.e. a general economic decline some months in the future. The reverse has historically held true as well regarding rising copper prices / demand versus a general economic recovery following some months in the future.

    However, in fairness, it should also be pointed out that the COMEX very recently raised margin requirements significantly on commodity futures contracts ... particularly for copper, silver and gold. This action alone can be used to explain margin call motivated sell-offs in commodity futures contracts by highly leveraged investors which would in turn force underlying commodity prices to decline.

    And there is a similar argument that the total 'supply' of various commodities now really consists of a mix of both actual physical commodities plus an increasing percentage of 'paper' commodities ... i.e. naked sales of commodity futures contracts by investors who don't actually own the physical commodity that they are contractually promising to deliver in the future. The increasing percentage of 'paper' commodities arguably increases volatility in commodity price levels, and also dilutes the correlation factor of the 'Doctor Copper' correlary since a reduction in demand for 'paper' commodities and a reduction in demand for actual physical commodities are indistinguishable as far as commodity price changes are concerned.

    As to Mr. Lira's prognostications in regard to future US FED policy, until instructed otherwise I'm going to 'hide behind' the official position that the US FED is an independent body that is free of political influence - and thus remains an acceptable topic of discussion in Dollar Den.

    thus the balance of Mr. Lira's comments ...


    (snip)But insofar as my overall view of the situation is concerned, this is what I think:

    Bernanke will drive a schoolbus over small children, in order to prevent his notion of deflation from coming true. This fall in the price of copper is much more relevant to his course of action as Fed Chairman than the fall in the price of gold (which was just a combination of options expiration coming up, and gold positions being sold to cover losses in other asset classes).

    This dramatic fall in the price of copper signals that the markets do not believe reactivation is anywhere near eminent—not for at least 9 to 18 months.

    To the traditional twin Federal Reserve mandates of price stability and full employment, Bernanke has added a third mission: That of “growing the economy”—whatever it takes, however unorthodox or reckless the measures.

    Therefore, it is my estimation that very soon now—end of this year at the latest—we will have QE-infinity—and beyond!(snip)


    Besides, you gotta love any financial analyst whose very name is the same as a currency !



    ~
    Last edited by Melonie; 09-24-2011 at 09:26 AM.

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    Default Re: weekend commentary - what 'Doctor Copper' is telling us

    Very interesting post...

    of course there is no such thing as a macro-economics topic that is 'non-political'. Personal finance maybe (where to put your money, etc) and to some extent micro-economics, but not macro-economics. For example take the inflation vs deflation dichotomy set up here. Both of these are inherently re-distributive. In fact any change in the value of money re-distributes it, and so is inherently political. The Fed is also the last thing that is apolitical these days, although it is a wish of the Fed to be perceived as such, and perhaps they really do see themselves as such. But one look at the campaign season will tell us that even if they are not interested in the political world, the political world is very much interested in them. And why not? Political outcomes these days are decided by economic outcomes, or that is how it is perceived in the political world.

    As to this topic therefore, Bernanke is seeking full employment, as consistent with the Fed mandate. It is perceived that deflation is correlated with joblessness, and a shrinking economy is also correlated with joblessness, all 3 are correlated with each other. In other words, if the economy goes back into recession, there will be disinflationary tendencies (deflationary only if things get very bad) renewed job loss, and a shrinking economy all together. The key piece missing from your post is unemployment and lack of jobs. Bernanke is very concerned about this.

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    Default Re: weekend commentary - what 'Doctor Copper' is telling us

    The key piece missing from your post is unemployment and lack of jobs. Bernanke is very concerned about this.
    True. But, for better or worse, a future economic / business climate leading to the creation of new US jobs and growing US employment levels is almost entirely dependent on future gov't policy ... thus extremely political ... and therefore now 'off limits' for discussion in Dollar Den.

    This of course is one of the reasons why my search for new Dollar Den topics now requires so much more time ... since said topics must be at least at 'arm's length' from politics. 'Doctor Copper' arguably satisfies that requirement.

    !
    Last edited by Melonie; 09-26-2011 at 03:20 AM.

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    Default Re: weekend commentary - what 'Doctor Copper' is telling us

    and speak of the 'devil' ... from

    (snip)"With the markets in turmoil, investors are looking for indicators that will help clean their crystal balls. Two of the more widely used economic indicators are copper and oil. Copper (NYSE:JJC) is often referred to as Dr. Copper, because of its ability to give insight to the future of the global economy. Oil (NYSE:USO) is often seen as the lifeblood of the economy since it is used in everything from plastics to finished motor gasoline. Recently, copper and oil have given investors reason to worry.

    On Friday, copper fell to its lowest level in over a year. Copper prices are down nearly 19% in only a week as the Federal Reserve announced, “There are significant downside risks to the economic outlook, including strains in global financial markets.” Copper had been relatively stable this year with demand strong in foreign markets. However, China (NYSE:FXI), once considered the country to keep demand in commodities (NYSE:RJI) high, continues to slow its economy. In addition to the HSBC (NYSE:HBC) preliminary PMI survey that showed China’s manufacturing may shrink for a third month, Freeport-McMoRan’s (NYSE:FCX) CEO gave a concerning outlook for copper. Richard Adkerson said, “A China slowdown has more of an impact than anything else.” He goes on to describe copper as a window for the global economy, and expects slower growth rates to continue. FCX is the world’s largest publicly traded copper producer, with operating, expansion, and growth projects in the copper industry. Copper also received additional pressure this week due to a decline in housing starts. Housing starts dropped 5% to a seasonal adjusted rate of 571,000 units. It was the largest drop since April.

    Although falling oil prices will offer some relief to consumers at the pump, the rapid decline this week has investors on edge. Last week, light crude oil traded near $90, but fell to an intraday low of $77.55 on Friday. It was the lowest intraday low since August. With global growth concerns increasing, brent crude has declined nearly 7% since last week. Also, oil companies such as Exxon Mobil (NYSE:XOM) and Halliburton (NYSE:HAL) are now trading at new lows for the year. On Tuesday, the IMF cuts it global growth forecast for this year and next. The IMF stated, “The global economy is in a dangerous new phrase. Global activity has weakened and become even more uneven, confidence has fallen sharply recently, and downside risks are growing.”

    Copper and oil both appear to be warning the markets that a global slowdown is underway. Equities are also signaling this as the Dow (NYSE: DIA) just finished 6.4% down this week, its worst week since October 2008. Furthermore, copper and oil are signaling that investors have lost confidence in the Federal Reserve’s ability to stimulate the economy through Operation Twist."(snip)


    The unanswered question in the case of both copper and oil, of course, is how much of the equation is actually based on reduced future demand for the physical commodities, versus how much is the result of hot money investors now facing stock market losses / margin calls being forced to liquidate their winning past investments in gold and oil to raise cash.

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