Some of the best forward looking recession indicators are in the commodities markets. Because they are generally a gauge for demand in the economy, they indicate where things are headed. Well, one of the best—copper—which is utterly ubiquitous across the global economy, is flashing some very worrying signs. Copper has had a very rough summer, but it has been worsening lately despite better share prices. The commodity just hit its lowest price in over a year. China accounts for around 40% of global copper demand. One analyst summarized the situation, saying “Copper is widely considered to be a bellwether for the global economy and so a weak price is cause for concern”.
FINSUM: Copper is partly at the mercy of the big fears in emerging markets, but that does not seem to account for the extremity of the selloff. This does worry us.
One the biggest and most conservative asset managers on the street has just put out an ominous warning to investors. Vanguard has just told investors that a near term recession (by 2020) is looking more likely. The asset manager is worried about the flattening yield curve and rising credit risk for sub-investment grade bonds. Vanguard says the odds of a recession in the next six months are 10%, and 30-40% by the end of 2020. The comments are unusual for Vanguard, who has stayed positive on the economy and is usually very conservative in calling markets and the economy.
FINSUM: Our own view is that the chances of a recession by the end of 2020 are much higher than what Vanguard is calling for.
There are a lot of bear market and recession indicators to make an investor nervous right now. There are also a wealth pf positive points. However, one area that really caught our eye was an industrial commodity that says a lot about the direction of the economy. Copper is in the middle of a big fall, and according to the Financial Times, the metal “is telling us not to worry a bit: the metal is telling us to panic”. Copper is down about 18% this year, and most of that fall is since May. Copper is used in a wide range of industrial applications across all regions in the world, it is utterly ubiquitous, so demand for it is a good leading indicator of economic performance.
FINSUM: This seems like a worrying sign, but we must say that some of the loss could be because of the trade war with China. That said, the sharp drop in prices is a very worrying sign.
The Wall Street Journal has put out an article painting an interesting, and perhaps realistic, view of how the trade war might play out. Their argument is essentially that the market itself will stop any trade war from becoming too serious. The WSJ says it best, “If the Trump trade war starts to squeeze economic growth, markets will react badly. When this happens, the impatient American president will have no choice but to declare victory, call off the war, and limit the damage”.
FINSUM: We tend to think this view is probably correct. That said, these kind of tariff wars can have unintended consequences that could make the damage more extensive and permanent than it is currently easy to foresee.
President Trump may have just ended a major part of the current trade war. All eyes have been focused on the President’s meeting with European Commission head Juncker today in Washington, an encounter that could spark trade fireworks between the US and EU. Most have said they have little hope of a positive outcome. Now, that might be entirely changed as the president last night tweeted out what must be the most hopeful statement of the whole trade war. He said “The European Union is coming to Washington tomorrow to negotiate a deal on Trade. I have an idea for them … Both the U.S. and the E.U. drop all Tariffs, Barriers and Subsidies!”.
FINSUM: It would be absolutely amazing to go from an escalating trade war to a US-EU free trade panacea. It seems unlikely to happen, but it could be a positive sign of collaboration.
Investors will know that the stock market is supposed to be a good inflation hedge, but precious few developed market investors will have ever seen how a market (or people) actually reacts during a period of heavy inflation. For a practical example, look no further than the misery that has befallen Venezuela. Inflation currently stands at 46,000% and is expected to accelerate to 1,000,000%. The government’s printing presses can’t keep up. But how has the stock market performed? The country’s benchmark index is up 73,000% in the last year. Wealthy Venezuelans are using it like a bank, buying stocks to deposit cash, and selling them when they need a withdrawal.
FINSUM: This is something you read about but rarely see in practice. It is an absolute shame what is going on in Venezuela, but a good lesson about the interconnection between stocks and inflation in practice.