COULD THE COLLAPSE OF THE COPPER MARKET, IN PART DUE TO CHINA’S FINANCING RESTRUCTURING REFORMS, ALSO BE REFLECTIVE OF A SLOWING CHINA DEMAND, WHICH COMBINED WITH A EURO RECESSION AND STRENGTENING OF THE DOLLAR, RESULT IN A GLOBAL CORRECTION OR EVEN SECOND RECESSION, AND HOW COULD THIS BE AVERTED? AND IS IT POSSIBLE THAT QUANT EASING CREATED A COMMODITIES BUBBLE, ESPECIALLY IN CHINA, THAT NOW MUST BREAK? AND WHAT MUST THE US DO TO RETHINK THE NEW NORMAL ? When China sneezes, the world gets the Flu. The Swine Flu. Today we saw the collapse of the Copper market, an event that Goldman Sachs predicted would occur back in May if prices started to slide below $3.00. Part of the slide is due to slow down in demand in China due to a correction in the over built housing market. And all the copper based commodity industries like construction, electrical wiring and telco. Most people do not know that China, unlike the US has backed its currency in Copper, in a series of shadowy deals that Xi is trying to unravel. This act alone would have affected the Copper market as China is a dominant purchaser (40%). But as most insiders will tell you, and DID tell you, the markets, as early as May of last year, that if this was not handled “orderly” that things could spin out of control. Further, there is definite evidence of slowing demand in China for copper based industries due to the Housing market “collapse”. In fact, the decline has been so severe, and inventories so substantial, that there has been problems securing new financing. “In the past three years, China has increasingly employed complex commodity financing deals to import relatively low-cost US dollar funding, which in some cases has likely been used to fund property development. While the profitability of these financing deals has already fallen owing to lower Chinese interest rates, higher rates outside of China, and – in the case of copper – persistent LME backwardation, we expect a further gradual unwind in such deals over the course of 2015 as China opens up its capital account gradually over time. This broader reduction in financing deals, combined with an expected rise in US interest rates, could result in higher costs of funding for Chinese property developers, potentially further slowing property starts and property-related commodity consumption. At the same time, a further reduction in deals would reduce demand for copper imports into bonded warehouses in China (a key component of the financing transactions), potentially raising inventory visibility outside of China. This scenario would be a double whammy for copper, which is both highly exposed to the property sector and supported by low visible exchange stocks.” The World Bank now predicts that Global Growth for 2015 will be closer to 2.4%, instead of the projected 3.0%. After heading two quarters of GDP growth of 5.0% and 3.5%, many experts see the US Economy growing around 3.5% on a sustained basis. I do NOT agree with this forecast. I believe that UNLESS WE DEVISE NEW REVOLUTIONARY APPROACHES that the US economy will slog along at 2.75%, and maybe break 3.0% if we can clean up this “Oil Meets Copper” mess. . One expert put it this way: “if the US dollar continues to rise, which would be the case if the Fed finally tapers, it would also put pressure on copper prices, I would expect a severe bear market in copper prices to occur when China’s economic bubble ultimately pops, and it will cause significant damage to the emerging market economies that rely heavily on copper experts particularly Peru, Chile, Zambia, and congo. A bear market in copper prices would also contribute to a popping of the emerging markets” J. Colombo Now I personally am very concerned about today’s development. While the trend certainly was exacerbated by Hedge Funds and speculators, it is not something I personally was surprised to see. The Fed’s Quant Easing was a big part of why global commodities prices rose to record levels after 2009. Now with the “popping” of the Copper’s market, and by the way, a number of other Metals and Mining stocks, and weakness not only in Europe but in emerging economies like China, and the latest December 2014 US Consumer Spending numbers which are encouraging along with jobs growth, amidst signs of real structural change in the US Economy away from Goods to Services, and with Consumer Spending becoming a less important factor* to driving growth, and strengthening of the dollar, with a jury out on the Net Effect of the Oil Price Restructuring, the prospects for a Global Recession appear to have increased. This would in turn curb the pace of the US recovery, in large part due to a decline in Exports which has been a driving force in US Growth. There is a hypothesis that I have been obsessed with for a while now. That hypothesis is based in the fact that we, the U.S. and its government and the Private Sector, really do not have a firm grasp on what is really going on with the Economy. First, I am not sure I trust the two THRICE adjusted GDP numbers, which now contain “more complete source data”. I would sure love to see that. But it is not the rate of growth that is my major concern, although it is my SECOND major concern because I think there are large inventories in the numbers and that means an “adjustment” in the next quarter, it is another matter. For sometime now, I have believed that we, the U.S., are not evaluating what is going on with the Economy correctly and because of this false foundation, we are effecting “solutions” that could wind up leading to a “New Normal” of stagnant 6 growth rates. One of the things that bothers me is the lack of precision with which we have tackled this problem. We have access to all this data, but we have taken sufficient advantage of it. Part of this is knowing where to start and what questions to ask. I have read enough expert studies to know that things are far from “normal”. What we need is a comprehensive understanding of the structural shifts in the Economy. Further we need tools to correctly diagnose the problem and monitorit closely. One of the measures that I believe has been undervalued and misunderstood is Productivity and Total Factor Productivity. Once we better understand the forces driving the New Economy, the better we will be at resuming real persistent growth, stimulating consumer spending, targeting the right industries for the US, and moving away from using the Fed to stimulating demand (which only distorts the M3-M6 data). Finally, things occurred during this Post 2009 Recession that were not operative in prior Recessions. We need to isolate and understand what these changes are. The Government continues to throw old solutions at new problems. Many of these solutions are aimed at “catching up” with those left behind. While emotionally I agree with this goal, rationally I do not believe it can be achieved using old tools and old ways of modelling the business climate. Hence, while I am sympathetic to the goals of these leaders, I am concerned that the proposed solutions will not achieve the desired goals and could actually hurt us. This development with Copper is a warning that should be needed. We do not get many warnings ahead of catastrophes and this one is a factor we need to quantity and diagnose correctly. The Copper Crash could be indicative of a seriously struggling Chinese economy. It may be an isolated departure relevant to a particular region, or it could be a major red flag that things are not what they seem. I am concerned that Europe is planning to undergo another round of Quant Easing, without have performed this exercise, on the predicate that it “worked” in the U.S. There are structural forces that we must acknowledge and effectively deal with. To ignore them will prove catastrophic. And “Easing” is never going to deliver real, sustained Growth. Either way, more precision would not hurt. Or as one expert in Europe put it: “I’m getting worried that this [drop in copper prices] is telling us not all is right with the global economy and that it is slowing faster than anticipated,” said Robin Bhar, head of metals research at Societe Generale. K.G.J. January 15, 2015 Copy right K.G.J.
Posted on: Thu, 15 Jan 2015 07:02:53 +0000
Trending Topics
Recently Viewed Topics
© 2015