Commodities | timiacono.com - Part 5

The precipitous decline in the price of copper over the last three days has dramatically increased the “pucker factor” for global financial markets as an increasing number of traders are taking copper’s price plunge as a cue to sell other assets.

Recall that copper is the metal with a PhD in economics since its use is so widespread and, as a result, its price provides important signals not just about the supply and demand of copper but of the health of both local economies and the global economy. Right now, it’s not saying anything positive about China or the world.

This CNBC report says the plunging price may be “acting as a fire alarm for the global economy” and fire alarms going off are never good. Even if it’s a false alarm, it’s highly disruptive over the short-term and, right now, it’s keeping people from buying stocks.

Bloomberg says iron-ore prices are also tumbling and that steel companies are teetering.

The real problem here is not the metal or the economy – it’s credit – and both copper and iron-ore have been widely used as collateral for sometimes dodgy loans from China’s enormous shadow-banking system that also appears to be teetering.

None of this sounds good…

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Yesterday, for the third time in the last 8 weeks, the trust for the SPDR Gold Shares ETF (GLD) added 7.5 tonnes to its holdings. These are the biggest daily inflows the trust has seen since late-2012 and they signal renewed interest in the metal by U.S. investors, a key prerequisite for extending the current gold market rally.

Last month, for the first time since December 2012, GLD saw a net inflow and the additions have accelerated in the first days of trading in March.

This recent change from outflows to inflows is important because GLD is widely seen as a good gauge of investor sentiment toward gold in the West and, in the view of many analysts (including myself), the gold market needs buying in the West to support higher prices.

Note that this is in sharp contrast to Asia where buying increases as prices fall. Should the gold price rise another few hundred dollars from here, those responsible for the record gold buying in China last year (at much lower prices) are going to look awfully smart as investors and traders in the West chase prices higher.

As shown below using data from the SPDR website, Monday’s big increase in GLD holdings follows the same size increase less than a month ago on February 13th and this followed less than a month after the same size gain on January 17th.

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Last month, for the first time since December 2012, GLD saw a net inflow and the additions have accelerated in the first days of trading in March. This recent change from outflows to inflows is important because GLD is widely seen as a good gauge of investor sentiment toward gold in the West and, in the view of many analysts (including myself), the gold market needs buying in the West to support higher prices.

Note that this is in sharp contrast to Asia where buying increases as prices fall. Should the gold price rise another few hundred dollars from here, those responsible for the record gold buying in China last year (at much lower prices) are going to look awfully smart as investors and traders in the West chase prices higher.

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A Perfect Storm for Inflation?

It should be pretty interesting to see how everyone reacts if and when sharply higher inflation finally does show up here in the U.S. The economic statistic that, since 2008, has been like the boy who cried wolf will probably have many more doubters than believers right up until the point when it’s too late to do anything about it (that was pretty much the story with the boy and the wolf and, of course, the sheep).

Anyway, they talk about the possibility of a tightening labor market playing a role in higher inflation (a key factor to really get broad-based inflation going) in this clip from CNBC.

That surge in agricultural goods last week took a lot of people by surprise and it’s shown in table form below from a data set that is maintained for the investment website.

Like most commodities, there’s a lot of ground to make up from last year’s drubbing for such products as corn, wheat, and soybeans, but they’re off to a great start this year so far.

It might be a good idea to cut out that extra cup of Joe in the morning as coffee prices just reached a two-year high. Now this is interesting … according to my data, the coffee price surged 77 % in 2010 but then fell 6%, 37%, and 23% in 2011, 2012, and 2013, respectively. Now it’s up 78% so far in 2014.

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Some highlights from former Federal Reserve Chairman Alan Greenspan’s commentary at The American on why all financial bubbles are not bad and how the world might avoid what increasingly appears to be an inevitable next financial crisis.

Bubbles, the root of the 2008 crisis and earlier ones, for reasons I will discuss later, have become more prevalent. All bubbles deflate, by definition. But most deflate without debilitating economic consequences. On the fateful day of October 19, 1987, for example, the Dow Jones Industrial average plunged 23 percent, the all-time daily record. I defy anyone to find economic disruption in the GDP figures following that date. I believe there was none. Similarly, in the dot-com boom, capital losses, as in 1987, were huge. But the owners of the toxic assets were mainly pension funds, households, and mutual funds; all suffered very large capital losses, but few ever got to the point where they defaulted on debt. And it turns out that the only two times in recent history in which we experienced real contagion in the financial markets were in late 2008, when, as AEI’s Peter Wallison has documented, there was a very destructive subprime mortgage crisis, the toxic assets of which, of course, were highly leveraged. And in 1929 we experienced a leveraged broker loan crisis. The result was contagious defaults.

The question before policymakers is how to avoid such breakdowns in the future. As far as I can see, the only way to address such issues is to recognize that euphoria-driven bubbles are an inherent consequence of human nature over which we have little or no control. Successful financial policy, in my experience, ironically spawns the emergence of bubbles. There was never anything resembling financial euphoria, or the bubbles it creates, in the old Soviet Union, nor is there in today’s North Korea. At the Federal Reserve during my tenure, we often joked that our greatest fear was that policy might be too successful. Achieving an underlying stable rate of growth and low inflation appears to have been a necessary and sufficient condition for the emergence of a bubble. We would conclude with mock seriousness that optimum monetary policy for bubble prevention was to create destabilizing inflation.

Can bubbles be prevented from rising once markets are in the grip of euphoria? At the Fed, we tried to defuse the nascent dot-com bubble of 1994. We failed…

He goes on at some length, but, I lost interest after the mid-1990s bubble-fighter reference.

The message appears to be: “It wasn’t my fault, we were too successful at the Fed, you can’t control animal spirits, and we’ll always have bubbles”.

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