Jan 18/15 – Don’t miss the message that copper is sending

2015-01-14 9am EDT  |  #bonds #copper #economy #Red Kite

The photo above was taken in 1903 at Chititu Creek, Alaska. What you are looking at is a 3 ton native copper nugget. It’s being a while since mining was as easy as scooping up monster nuggets sitting on the creek bed. Nowadays copper mining is a capital intensive affair that involves digging deep into the earth’s surface and processing tons of rock to yield the tiniest bit of copper. Yet during the commodity boom of the last decade, we still managed to find a way to create too much supply. The idea that China would buy all every last available pound of copper simply encouraged way too many mines to be brought on stream. And now today, not only is China failing to grow at the anticipated perpetual blistering pace that the China bulls were continually touting, but there appears to be some concerns about the possibility that China (and the rest of the global economy) has hit a growth air pocket.

This global slowdown hit the copper market hard last night. When China opened for trading, they absolutely destroyed copper – sending it down almost 7% almost instantly.

Copper has often been called the metal with a PHD in economics due to the fact of its widespread application in many different sectors of the economy. When economic activity picks up, it often translates quickly into a higher copper price.

Obviously copper still has its own supply demand cycle and does not translate perfectly into a barometer for economic growth, but you would be foolish to not listen to the signals that it is telling you. And the message coming from copper is pretty clear.

During 2014 copper valiantly tried to hold in at the long term support area of $3 per pound. Towards the end of last year, that support broke and it stabilized at around $2.80 per pound. But over the last week or so, it has been a one way train lower. If copper has a PHD in economics, then it doesn’t portend well for the global economy.

If it was only copper that was crashing, then I might be willing to entertain the idea that maybe copper’s ability to forecast economic growth might be fading. After all, according to the WSJ, one hedge fund seems to have taken a big position late last year:

A single buyer has snapped up more than half the copper held in London Metal Exchange warehouses, giving it control over a crucial source of supply and raising concerns among traders about the potential for higher prices. On several occasions in the last month, this buyer held as much as 90% of the world's copper stored in LME-licensed warehouses, equal to about 140,000 tons, or enough to make the copper parts of the Statue of Liberty more than 1,700 times. As of Wednesday, the buyer owned between 50% and 80% of copper held in warehouses, according to the most recent exchange data. At today's prices, a 50% to 80% share of LME copper inventories would be worth anywhere from roughly $535 million to about $850 million. Although the exchange doesn't identify the owners of metals, eight traders and brokers working for different firms active on the LME said they believe Red Kite Group, a London hedge-fund manager that focuses on metals trading, was the one buying. One of the brokers said that when he needs to buy copper for clients, contacts in the market refer him to Red Kite, indicating the fund is sitting on a large pile of metal.

Maybe this copper puke was Red Kite finally giving up supporting copper’s price. If that was the case, then you would be tempted to dismiss copper’s fall as a sign that global economic demand was sagging.

But copper is far from an isolated case. Demand seems to be falling everywhere. Whether it is oil, iron ore, grains, or whatever other commodity you pick, prices are plunging.

And it is not only commodities that are screaming Danger Will Robinson, the world’s bond markets have been soaring during the past couple of quarters as well. I have created a simple average of the yield for Japan, US, German and UK’s 10 year bond.

Over the past six months the average yield has been more than halved! The bond market, which is usually a better predictor of economic activity than the stock market, has been warning that something really bad is happening to the global economy.

Market pundits will claim that this retreat in yield is the result of anticipated ECB QE, but I think if anything, it is the result of an ECB that is too tight.

Something is really wrong in the global economy. Copper is just another warning signal. I have been bearish on stocks for a bit, and I see no reason to change my tune. One of these days the stock market is going to wake up to the fact that all the other financial markets have already realized.

And the idea that the Fed is going to tighten into this sort of global slowdown is absurd. It is getting late and I should wrap up, but make no mistake about the signal that copper, oil and bonds are sending you – something is really wrong…