Sunday, March 16, 2014

Why is Copper Falling?

Why is Copper Falling?

It’s the Economy, Stupid.

I wrote an article towards the last quarter of 2011 called “Copper has a Phd. in Economics”, where I stated that one of the best indicators of the global economic cycle is Copper due to the immediate effect on its price when demand in general slows, as it is used intensively in Manufacturing, Industrial activity and Construction, to name a few very important areas of the economy, key to its sustainability.

As it turns out, here we are three years later and the results continue to validate the theory. Lately Copper has been falling more precipitously due to the bad numbers coming out of China, which will likely grow below 7% dragging world consumption and GDP.

I mentioned last week, the growth of the emerging markets economy since 2009 was one of the key pieces of the world moving forward (aside of the absurd amount of debt incurred by the developed world, which eventually will get paid in some shape or form). Domestic credit creation, a boom in industrial production and large amount of reserves kept the emerging economies pulling the train, but they are running of out of steam due to the natural law of diminishing returns.

Let’s take a look at the high correlation between China’s growth and Copper through the two following graphs:

It is possible to see that the fall on Copper prices is not a recent phenomena.

And neither is the decline on growth of the Chinese economy.

The spillover of China’s lower growth will first be felt in Emerging Markets (as it is already the case), although it is inevitable in this globalized world to assume that eventually the Developed World will feel the heat. Not even another round of QEternity in the US, or some form of QE in Europe (let’s calling plainly money printing) or a second (third?) round of Abenomics in Japan will suffice to save the day.

I have already demonstrated in recent comments that the increase in debt and money printing have reached levels of marginal contribution. Let’s just say it: the slowdown is now global. And money printing and credit creation will increase, which in turn will probably save us from falling off the cliff short term and postponing the pain. But debt has by design the ability to destroy those  who never get to amortize it, it’s like a snowball that builds over interest growing exponentially (interest over interest).

Can china make a soft landing? My answer is that it’s very difficult from a physics point of view to make a soft landing on a Jumbo 747 fully loaded. 

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