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Dr. Copper Catches Pneumonia

01-14-2015

Copper led commodities in general lower overnight, as well as world stock markets, as it declined about 6% before cutting its losses to 4%-ish, after having been roughed up for about 3% yesterday. So at this moment copper is following oil's path lower, along with many other commodities as well.

A Strong Conductor of Weakness Whether it turns out copper has been undermined by the same phenomenon as oil -- i.e., misallocated capital -- we won't know for a while, but what is clear is that the signals emanating from financial markets are grossly distorted because of the absolutely extraordinary amount of money that's been printed by the U.S. and other central banks in the last group of years.

The crosscurrents and potential for whipsaws in many of these markets is absolutely extraordinary, and at times it can be rather confusing as to what, if anything, the markets are trying to tell us. Regretfully, I think much of it is noise caused by all the printed money, but not all of it, and ferreting out the difference between the two is going to be important -- and tricky.

Like a Cartoon Cliffhanger: Just Don't Look Down One thing I am absolutely certain of, there is no way the stock market can hold together in the absence of QE and the presence of the weakness in the world economy that we already know about, much less the as-yet-unknown consequences that the break in oil, copper, and credit markets might inspire.

It is actually remarkable that the stock market has held up as well as it has thus far, and on every day that it looks ugly it seems many people are still eager to buy the dip. Perhaps that isn't terribly surprising given the fact that the last six years have essentially been straight up, with very little angst (certainly the last couple of years have had very little), so at the moment there doesn't seem to be much fear among U.S. stock investors, even given the long and mounting list of things that could potentially go wrong. For the time being, the prior price action and momentum seems to carry the day, though that does appear to be changing.

Turning back to the action, the indices were all negative early on, with what buying there was concentrated mainly in technology, as folks seems to believe that somehow that sector will be immune to worldwide economic distress. After the early weakness, the indices alternated between rallying and declining, but went nowhere. By day's end the market was 0.5% lower (though the Dow lost 1%).

FX: Like a Beauty Pageant for Warthogs Away from stocks, oil bounced 5% (finally), while green paper was weaker. Parenthetically, I firmly believe that the dollar is on borrowed time. It is where it is simply thanks to the stock market soaring on the back of easy money, which caused people to believe that the economy is stronger than it is and that the Fed will be raising rates. The problem is, other colored pieces of paper all have their own warts.

However, I think expectations are so high for the dollar, and positions are so huge, that trouble is inevitable. As big a hunk of junk as the euro is, when the ECB starts QE, the euro may (perversely) rally. In any case, I'm not really doing much regarding the dollar because if it does weaken, precious metals will quite likely do very well. Today silver and gold both held up well (compared to base metals), as the latter was flat while the former lost 1%.

Yield Sign Translation: Do Not Enter! Turning to fixed income, it was very strong with the U.S. 30-year bond making a new low in yield of around 2.40%. The bond markets are the epicenter of distorted prices, thanks to what the central banks have done, but that has been the case for some time and doesn't mean it will change soon. In the short run, weakness in stocks or bonds will likely cause even more bond buying, but the bond market is going to be the scene of the accident of a lifetime at some point, even if that appears to be several steps ahead of us still.