Trader’s Narrative

The above is a short clip from the full video, available free here.

For more information, check out the implied deflation in the TIPS spread and the message of Dr. Copper.

One of the very few economists that foresaw the financial crisis was Canadian David Rosenberg. He was the chief North American economist at Merrill Lynch but recently moved back to Canada and joined the boutique asset management firm of Gluskin Sheff in Toronto.

While the FOMC has held the Fed Funds Rate at zero to 0.25 since December, a recent report prepared for the San Francisco Fed claims that this policy will have to be continued for much longer than first anticipated.

In a recent report, Rosenberg shows the chart below and points out that the Fed may very well have stopped easing. Although the Fed’s balance sheet exploded in 2008 as they went on a liquidity rampage, it hasn’t budged so far this year. The ‘real’ rate (adjusted for inflation) is closer to +0.77%, having rapidly recovered from the extreme low in late 2008:

There are several relevant variables to watch: the 3 month Treasury Bill rate; Dr. Copper - which has already signaled that the worst is over; and the Baltic Dry Index which has now surpassed the March 2009 swing highs and begun a new uptrend.

You can sign up to receive Rosenberg’s daily market commentary from Gluskin Sheff.

According to the difference between 10 year nominal treasury bonds and TIPS (Treasury Inflation-Protected Securities) we were headed for a major, even catastrophic deflationary scenario. Although the jury is still officially ruminating, looking at the market price of copper, it seems that the massive monetary and fiscal measures taken by the US and other major countries around the world have removed much of the risk.

As one of the most important industrial commodities, copper has a Ph.D. in economics. Since it is freely traded in a market, its price is decided upon by the wisdom of the “invisible hand”. Copper can even predict recessions! Right now, it is offering the first glimmer of hope within a very dark and gloomy economic outlook:

The lower window pane in the above chart shows momentum or more specifically, the annual rate of change. When it drops below zero, the economy tends to sputter. Right now, copper momentum is still mired in the negative. And to bring it back to zero, copper futures have to, at least, recover to $325. Which is a very tall order.

Obviously we aren’t there yet, but the rapid ascent which started late last year has already taken the industrial metal +50% from its low. So we if it continues in the same torrid pace, we’ll get there in no time. But no market is that simple, nor direct. Copper futures have jolted higher so within a shorter term time span, it will need to work that out before continuing.

But if we are truly in the first stages of a recovery, then copper is the commodity to watch. If the worst is actually over, then the price trend in copper will be the first to know. Way ahead of, and with much more accuracy than, any talking head on TV.

It is official. And about a year too late. But the economists at the National Bureau of Economic Research (NBER) have spoken:

The committee determined that a peak in economic activity occurred in the U.S. economy in December 2007.
Business Cycle Dating Committee

Way back in September 2007 I started wondering, “Are we in a recession already?” - then at the start of January 2008, officially called it: we are in a recession.

In that post I showed a chart of the Google trends for “recession”. By the end of January 2008, the Google trend for “recession” was off the charts.

Then most recently, I mentioned that according to Dr.Copper we are in a recession. If you look closely at that chart, the annual rate of change did go negative in early 2007 (just barely). But enough to warrant a signal, just as previous ones.

Even LOLcats got in on the act and signaled a recession before the NBER economists.

Economics must be the only profession where you can make a living driving by looking at the rear view mirror. Too bad traders can’t make buy and sell decisions once the charts have been printed.

Copper is famously said to have a Ph.D. in economics. So let’s see what Dr. Copper says:

By now you’re hard pressed to find anyone who won’t be bracing themselves for an economic slowdown. And that is reflected in the historic low of American’s satisfaction levels.

Interestingly enough, when the annual rate of change of copper futures goes into the negative, it signals a recession.

Of course, the National Bureau of Economic Research conveniently labels them after the fact. So we know that officially there was a global slowdown in 1998. And one that lasted from 2001-2003. Notice that this time though the rate of change is much deeper into the red.

Stock market investors and traders who are looking for a bull market may be mollified to know that the market is a forward discounting mechanism. So somewhere between 6-8 months before we are going to see an improvement in the economy, unemployment, real estate, etc. the stock market will shake off the bear market.