Wednesday, July 7, 2010

Dr. Copper says the patient is fine


The price of copper is traditionally such a good indicator of the economy's health that copper has earned the nickname "Dr. Copper." In this chart we see copper trading today at about the same level as it was for a few years prior to the crash of 2008. At $3/lb., copper today is worth almost five times as much as it was in November 2001, when most commodity prices hit bottom. That was also the end point of the 2001 recession, and also the beginning of what would be many years of very accommodative monetary policy from the the Federal Reserve.

I keep hearing the drumbeat of deflation concern, but it's hard for me to understand. Back in the early 2000s deflation risk was extremely high: gold fell to $260/oz., most commodity prices hit lows they hadn't seen since the 1970s, and the dollar was soaring against most currencies. Now all these key indicators of the scarcity of money are reversed: commodity prices are near all-time highs, gold is $1200/oz., and the dollar is in the lower end of its historical trading range vis a vis other major currencies.

If nothing else, copper prices today tell us that deflation is not a concern but that inflation is. I think copper also is telling us that the global economy is pretty healthy, as demand for the metal has been unusually strong for a number of years. My friend Mike Churchill points me to an interesting story suggesting that copper supply is also relatively tight. Whatever the case, $3 copper is saying that deflation and recession are simply nowhere to be found in the global economy.

11 comments:

Benjamin said...

Yes, but Dr. Steel is feeling sick--see cover of WSJ today. Steel production and prices are going down.

Cabodog said...

Copper's strong, freight prices are firming, rail traffic is up and even the lowliest creature on the planet, airlines, are reporting growth.

"Airline stocks rose Wednesday with the wider market and after carriers reported good seat-capacity management in June along with greater passenger demand."

Cabodog said...

Scott, slight typo, maybe indicative of your inflation fears: "$3/oz."

Benjamin said...

The Rogers International Commodity Index, a very broad mix of raw materials, is down about 10 percent for the year.

See http://www.rogersrawmaterials.com/page2.asp

Scott Grannis said...

Cabodog: thanks. Another senior moment.

Scott Grannis said...

Benjamin: Copper prices are down even more, but I think that's within the price volatility one should expect from commodities.

John said...

I am with Scott on this one. Mr. Market has ODed on deflation fears. Bonds (especially treasuries) are overbought. Stocks have been oversold.

Celebrated long/short hedgie Dougie Kass has made another bold prediction: Last night on Fast Money (I hate that name - but it sells) he said we have seen the lows in the S&P for the year. I do not know if he will be proven correct or not but he has been right often enough for me to LISTEN when he makes bold pronouncements. This market is deeply oversold and he could certainly be right..again.

One other thing: He is buying TBT aggressively. The bull market in treasuries may be nearing its end. Something to watch.

Benjamin said...

Scott-John-
Every day I issue a secular prayer for an economic boom and stock market surge.
But money is way too tight to allow it, I think.
A long deflationary recession may be ahead, unless we can think innovatively and aggressively about monetary policy.
I hope I am wrong.

John said...

Benj,

I believe your prayers will be answered...just not for awhile. It requires bold confidence in the future on the part of businessmen/women for a sustained period of time to create a boom. That confidence requires political leadership and a benevolent government toward business that is still a long way away. The people in power in Washington IMO are incapable of building the confidence necessary to make a boom happen. The best we can hope for over the next few years is moderate GDP growth with low inflation. That is not a bad environment for property and equities, but it is no boom.

If there is one thing that does not change, it is that change is constant. One party rule in Washington will end and the pendalum will swing back toward benevolence toward business and investment. When that happens, confidence in the future can grow over time and we will have another boom. But it is not going to happen with the bunch running Washington today.

Just my cheap opinion.

Benjamin said...

John-
I am no Obama fan. But we had long periods of solid economic growth under much worse. Regulations and taxes are light today, compared with the past. Sheesh, we had wage-and-price conrols under Nixon(!).
I think the right-wing is reacting more to radio talk-show theatrics than real economic needs.
The pressing need now is for an aggressively expansionist monetary policy.
The M2 chart posted by Scott seems to show a do-nothing Fed, in the face of the worst recession since Hoover. Less stimuylatiev than 2000-2004.
We have declining unit labor costs. We have declining retail rents (see cover WSJ re malls). We have declining commercial rents and property values. We have falling raw material prices. We have one out of 11 commercial property loans gone sour. The banking system simply seizes when property deflates.
Give unto me a long inflationary boom (of the type George Gilder rhapsodized about, when the Reaganites were gutting Volcker-Stockman) rather than a long deflationary recession.
Indeed, I think deflation tends to set in motion a lengthy recession--banks have so much bad debt, they can only recover over decades.
Entreprenuers, who routinely tap property equity for expansion capital, find they cannot. Homeowners feel less wealthy.
Like it or not, the nation needs steady inflation.
Right now, we are going the other way.
No wonder people are buyng Treasury bonds for no yield. At least it is better than losing money on deflating stocks or property.

John said...

Benj,

I do not mean to criticize your politics. There are elements in both parties I do not like.

I have several friends that are business owners and they are pessimistic...every one of them. Pessimistic people are hesitant to hire, hesitant to spend, hesitant to invest. The reason is this government. Now I know this is anecdotal but IMO it cannot be an isolated opinion. Many others must have it also. I just do not think this particular government can change those opinions into confident optimism. I do believe there are many democrats that are pro business but they are not the ones percieved to be making the decisions. At least not by the business owners I talk with.

Until most business people become optimistic about the future I do not see how there can be a boom...no matter what the Fed does.