Economic Outlook: The Approach of a Long, Cold Winter
As chill winds of deflation sweep through the economic landscape this autumn, global trade struggles and commodities sit neglected, resembling forsaken scrap metal covered in frost. The optimism that once buoyed markets as we entered 2015 has turned cold as the year approaches its end.
Not long ago, the narrative was that the U.S. economy was on a steady trajectory of improvement while major global players like Japan, China, and Europe faced turmoil. This storyline suggested that the U.S. would maintain its momentum, with stock prices perched on an ever-high plateau.
However, amid the plummeting oil prices, a strong dollar, and sluggish consumer spending, the economic narrative has veered into more troubling territory. What once seemed like a journey toward growth and recovery has shifted toward a disconcerting cycle of stagnation and malaise. Mass misinvestments in sectors such as U.S. shale oil, Brazilian mining, and Chinese real estate are challenging the overall economic landscape.
Facing price corrections, bankruptcies, and the necessity for debt restructuring, the economy finds itself in a painful phase reminiscent of a farmer laboring over an endless row of overripe strawberries. Sore backs, sunburned necks, and sore fingers are the harsh realities ahead. It’s becoming clear that the U.S. economy isn’t insulated from the global disorder.
Weekly updates reveal that rather than showcasing strength and growth, the fundamental aspects of the economy are deteriorating. Manufacturing is slowing down, and consumer spending shows signs of weakness. To delve deeper, let’s consult Dr. Copper…
The Void of Worldwide Non-Activity
Dr. Copper—the metal with a doctorate in economics—is renowned for being an early predictor of economic trends. Its extensive use across various industries, from infrastructure to housing and consumer electronics, provides a reliable gauge for economic activity.
Typically, when copper prices rise, economic activity follows suit. Conversely, a decline in copper prices often signals economic stagnation. Here’s the latest insight from Dr. Copper and his fellow industrial metals…
According to a recent report from Bloomberg, “Copper plunged to the lowest intraday price since May 2009 amid concerns of dwindling demand from China and a dollar nearing its strongest levels in over a decade.” Furthermore, lead hit its lowest price since 2010, with all industrial metals experiencing a retreat.
“Copper utilized in power cables and wiring fell by as much as 2.1 percent to $4,590 a metric ton on the London Metal Exchange before recovering to $4,654 later in the day. Futures dropped by as much as 4.3 percent in Shanghai. Codelco, the largest copper producer, has reduced the premium it charges for Chinese buyers by the most significant amount since the global financial crisis, while Arc Resources Co. forecasts a 10 percent decline in refined copper imports from China in 2016.”
It’s evident that if the economy were strengthening, we wouldn’t observe commodity prices sinking to levels reminiscent of the Great Recession. Robust demand would buoy these prices instead of ushering them into a realm of inactivity. Stocks may soon mirror this downward trend…
The Long, Cold Winter Ahead
The last occasion copper prices were this low was in May 2009, a time when stock prices were considerably lower as well. Back then, the DOW hovered in the low 8,000s, while currently, it stands above 17,500.
This raises a pertinent question: how can stocks remain elevated while the economy appears to be in decline? It’s possible the economy is merely pausing, preparing for a resurgence. However, it seems more plausible that it’s bracing itself for a long, cold winter.
The process of financialization, characterized by significant leverage, has widened the gap between stock market performance and economic realities to unprecedented levels. There may be another speculative surge ahead, with predictions of DOW reaching 20,000 or even 30,000 becoming prevalent.
With sufficient monetary manipulation, virtually anything can seem achievable. Yet, the laws of gravity still hold true. Stocks cannot ascend indefinitely.
After six years of a bullish market paired with a tepid recovery, it’s entirely plausible that stock prices could revert to levels more in line with current commodity valuations. Consider that just a few years prior, a DOW of 8,000 correlated closely with present copper prices. This alignment is likely to reemerge soon.
Sincerely,
MN Gordon
for Economic Prism
