With Inflation Emerging As Biden's Biggest Nightmare, One Strategist Counters: "Inflation, Like Greed, Is Good"
Now that inflation is up from 1.4% to 6.2%, and even Powell admits it is no longer "transitory", BofA's CIO Michael Hartnett pointed out in his latest Flow Show note what was obvious to most, namely that inflation is rapidly emerging as an economic and political problem, as he points to a chart showing Biden's approval rating sliding from 56% to 42% YTD as inflation has soared, or as the BofA strategist summarizes, in the context of "inflation, politics (midterms Nov22), and credibility, the Fed set to be very hawkish next 6 months" something the market is finally freaking out over with high-duration (read growth and tech) names tumbling.
Yet while Biden will do everything in his power to crush consumer inflation ahead of the midterms, perhaps even nuking the market in the process (only to force the fed to launch the biggest and probably last monetary stimulus shortly after), some like Academy Securities strategist Peter Tchir take the other side and in a note published overnight in which he channels his inner Gordon Gekko wrties that "Inflation, Like Greed, is Good.
Paraphrasing the best Wall Street movie made, Tchir writes that “Greed, in all of its forms…has marked the upward surge of mankind” and adds that "while I may not believe everything that I write today, it seems as though inflation, much like greed, is in dire need of someone to champion it."
This topic is relevant because, as we first showed on Friday and as Tchir writes today "some of Friday’s price action could be linked to markets pricing in monetary policy mistakes. The shape of the yield curve and the sectors that underperformed all fit into a narrative that could encompass a monetary policy mistake (and is also partly due to the market trying to adapt to The Training Wheels are Off)."
The Academy strategist next makes the point that "the politicization of inflation is the biggest reason that we might get a monetary policy mistake!" and goes on to note that "it is the politicization of inflation (which could lead to monetary policy mistakes), that leads me to take up the mantle and defend inflation."
As Tchir lays out in further detail in his full note below, here are the core tenets behind his argument:
Inflation is Good
We start by examining what central banks have been trying to achieve, what they’ve achieved, and why they aren’t taking victory laps.
Stagflation is Bad
We agree that stagflation is bad and through a series of charts focusing on jobs and wages, we demonstrate that we are nowhere close to stagflation and the economy is outpacing inflation.
What About Gas?
Somehow inflation always seems to come back to gasoline, and we address some of the absurdity around this issue. We also introduce the concept of carbon offsets and where this fits into the inflation argument.
Hedonic Adjustments
If you didn’t think that we could make an argument that rising gas prices aren’t actually rising, you are in for a pleasant surprise. In all seriousness, thinking about hedonic adjustments for products and processors that are sustainable isn’t as strange as it might sound.
What is Driving Inflation?
It is difficult to argue whether inflation is good or bad if we don’t examine what is driving it:
Jobs and wage growth.
Supply Chain issues.
ESG.
Transition plans.
Supply chain repatriation.
Monetary policy.
Tchir summarizes his controversial argument as follows, "Maybe Inflation Isn’t “Good” But It is Necessary: At this moment in time, I do not see any way of achieving our goals without generating inflation. So long as inflation is accompanied by job and wage growth, who really cares about it?"
Bottom Line: Don’t bet on a policy mistake. Bet on cyclical, domestic growth. As Bud Fox says, “Life all comes down to a few moments” and I think that we need the courage to ride this paradigm shift through and accept inflation as just a part of that goal!
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Tchir's full note is below:
Inflation, Like Greed, Is Good!
Today, I will channel my inner Gordon Gekko, who told us that “Greed is Good.” That “Greed, in all of its forms…has marked the upward surge of mankind.” While I may not believe everything that I write today, it seems as though inflation, much like greed, is in dire need of someone to champion it.
For purposes of this report, there are a few things to clarify:
If I had been Chair of the Fed (please stop laughing), I would have finished with bond purchases a long time ago. I don’t necessarily agree with the path that the Fed took, or some of their inflation goals, but we will play this hand with the cards we’ve been dealt.
I’m reasonably on board with carbon and climate efforts, though want to highlight a few caveats, which might get lost in this report as today’s goal is to justify inflation rather than fixate on the details of carbon and climate initiatives:
We need a transition plan. I’ve harped on this and we see the harsh reality in Europe almost every day. Without a well thought out transition plan we put ourselves at risk.
Incentives and rules are ripe for manipulation. Any policy or rule instantly creates a cottage industry for those trying to get around it (and for those trying to take advantage of it). It may well be that the goals are laudable enough that we can tolerate or even benefit from this behavior, but ignoring this reality doesn’t help us much.
Acting without China’s full cooperation is a very serious issue. The climate is global, so without China, a massive contributor to the world’s carbon issues (including plastics, and other nasty environmental issues), we run the risk of not only failing to fix the problem, but getting left behind economically and in terms of global power (not power, like energy, but power like might).
This topic is relevant because some of Friday’s price action could be linked to markets pricing in monetary policy mistakes. The shape of the yield curve and the sectors that underperformed all fit into a narrative that could encompass a monetary policy mistake.
The politicization of inflation is the biggest reason that we might get a monetary policy mistake! It is the politicization of inflation (which could lead to monetary policy mistakes) that leads me to take up the mantle and defend inflation.
Inflation is Good
Whenever I focus on a topic, I try and figure out what the smart people are thinking. What do the people who live and breathe inflation think about it? Well, until about a month ago, every single major central bank was fixated on generating inflation. Generating sustained inflation (at an acceptable level) has been one of the main goals of monetary policy across the globe for years (if not decades).
So, we have a group of very intelligent people from across the globe who’ve fought to create inflation for years (which I take as one sign that it might be a reasonable goal). Does their sudden aversion to inflation represent a real shift in their thinking? Or are they bowing to political pressure?
It seems somewhat odd that this group has finally started to achieve their goal and rather than doing victory laps, they are barely defending their actions. It is this behavior that sparks my fear that we could get a policy mistake – not because they think their policies are wrong, but because they face intense political pressure to adjust their policies.
We will come back to why inflation is good in a moment, but let’s address why it isn’t bad.
Stagflation is Bad
We can all agree that stagflation is bad. That slow growth coupled with high inflation is bad. Thankfully that is NOT what we have right now! We have inflation (I’d argue more medium than high), but we have STRONG growth!
While not quite back to pre-pandemic levels, the number of people employed in the U.S. is at a level that has only been better for a few months in the entire history of the country.
I went with the non-seasonally adjusted version since I think that the seasonal adjustment this year will turn out to be incorrect. At the same time, we have a record number of job openings and people are extremely comfortable quitting their jobs!
From a job’s perspective, the economy looks pretty darn good! This is the jobs picture without any form of infrastructure spending getting passed (which should only increase the outlook for jobs). It will also increase inflation, but isn’t that worth it?
Not only are there jobs, but the pay is pretty darn good!
Average hourly earnings are now much higher than they were pre-pandemic and are at their highest levels ever. The average hourly pay just before the pandemic was $23.88 and is now $26.40, almost $3 per hour higher, and that will buy a lot of gas (more on that later).
Even adjusted for inflation, they are 2.2% higher than they were before the pandemic started. This doesn’t even attempt to account for all the benefits that have been paid to people over the past few years, including the signing bonuses many are getting. If anything, the official wage data understates the total income people are receiving.
So, jobs are coming back with a vengeance and they are paying more. Heck, the pay is keeping workers ahead of inflation, and while I do not think inflation is transitory, I do think it will settle into a range between 2% and 4%, which should be low enough (if we can maintain growth) that almost everyone who is working will be better off!
What About Gas?
Somehow inflation always seems to come back to gasoline. I’m not sure about you, but I probably use less than 10 gallons of gasoline a week. I checked and according to the U.S. Department of Transportation’s Federal Highway Administration, the average American drives 13,500 miles per year (higher than me but seems reasonable). They choose to use Ford F-150’s average miles per gallon (which seems conservative) to come up with 562 gallons a year (weirdly, not much above my guess of 10, which means that on average, Americans buy less than 2 gallons of gas a day!)
So, for all the handwringing about gasoline prices (something sensationalized by the media, which has sparked interest from politicians), most people can pay for their extra cost of gas with 1 hour of their higher pay. Seems like a reasonable trade-off.
While this data series only goes back to 2006, average gasoline prices were higher for several years as we emerged from the GFC. They are up about 51 cents per gallon since late 2018 (so $1 a day for the average American).
There are huge differences by state. According to AAA, California is at the higher end at $4.68/gallon, while New York is $3.54 and Virginia is $3.22. Not all states had similar moves in gasoline prices and we shouldn’t ignore various state rules that cause their gas prices to be different.
While I’m not here to argue about European gas prices, I cannot help but bring up the following chart, as I think it is crucial to the inflation is “good” argument.
This is the EUA carbon allowances front contract. My understanding is that refiners, amongst others, are forced to buy offsets to their carbon footprint. The rise in prices would make even the crypto market green with envy!
Hedonic Adjustments
For some reason, I want to call them “hedonistic adjustments” when the BLS adjusts prices to account for quality.
It is something that they have done for a long time. It is questioned by many, but it is a tool that they use to try and reflect large changes in quality that can affect prices over time.
So, if you have gasoline that protects the environment (because the refiner had to offset their carbon usage), did the price go up? That sounds weird at first, but that is the nature of hedonic adjustments.
Is gasoline that will “save the planet” better than gasoline that doesn’t offer that? For this portion, I’m going all in on the carbon/climate side of things.
The price will go up because the offsets are a cost and some of that will get passed on to the consumer, but if you are willing to believe that 2,000,000 pixels are so much better than 2,000 pixels and the price of that “thing” hasn’t really gone up, then why not accept that products that are made more sustainably or have purchased carbon offsets are better? Please go back to my caveats from earlier, I haven’t forgotten them, I’m just getting on a roll here.
This all gets tricky (I don’t have any answers) and this gets a little bit away from the “inflation is good argument”, but this is tied to it because it would be a reason to accept higher prices.
What is Driving Inflation?
Whether we are going to hedonically adjust for prices or not, let’s look at what is driving inflation:
Jobs, wage growth, and government payments (though these are less important now than during the worst parts of the pandemic). Plain and simple, jobs and wages are boosting inflation and I don’t see that as a problem. Should we not try and rebuild our often-decrepit infrastructure and not create jobs and demand for raw materials that would increase inflation? That seems silly to me.
Supply Chain issues. Trying to address some of these. Whether it is overtime at the ports or flying goods in, etc., both have a real cost. Much of this will dissipate over time as countries across the globe figure out what the new post pandemic normal is. This should somewhat take care of itself and is somewhat out of our control.
ESG. I’m not going to spend much time on this as I’ve written so much about the subject over the past year, but I want to highlight a few things:
Any transition plan will call for massive investment in new things, but there will be maintenance investment required for old things for some time (i.e., more money will be spent than if we weren’t transitioning). That will be inflationary, but I don’t see how to avoid it (or why we’d want to avoid it).
Supply chain repatriation. Some of the existing supply chain “issues” will be resolved by shifting where things are made (including domestically). Some industries, like anything related to healthcare, will feel intense pressure to produce in areas where we have complete faith in the jurisdiction and quality of the products as well as access when we need them most. This will have a cost, but will create jobs, so again, I’m not sure why we wouldn’t accept inflation as a cost of this.
Monetary policy. I didn’t even bold this, because quite frankly, when I think about what is causing inflation, monetary policy isn’t high on my list. Which is why I’m so concerned that we could see a monetary policy mistake as the politicians weigh in.
Maybe Inflation Isn’t “Good” But It is Necessary
At this moment in time, I do not see any way of achieving our goals without generating inflation.
If national health and safety is a goal, then how do we achieve that without inflation?
If carbon reduction and sustainability is a goal, I don’t see how we achieve that without inflation?
So long as inflation is accompanied by job and wage growth, who really cares about it?
Again, I’m not sure I want to go down these paths, but if people are correct and this is saving the planet, maybe it’s not inflationary at all compared to the cost of not doing it. Okay, that statement is a bit out of my comfort zone, but there are many who adamantly argue this point.
I think that the stupidest thing we could do right now is cut off our growth trajectory because a few politicians can’t do basic math, can’t understand that there will be some trade-offs, and are pandering to some audience who isn’t more than benefiting from the economic growth being generated as we make massive changes to our economy and how we compete globally.
So, what the heck, inflation is good while accompanied by growth and it would be a policy mistake to kill that growth too early (especially when monetary policy isn’t what is driving inflation in the first place).
Bottom Line
Don’t bet on a policy mistake. Bet on cyclical, domestic growth. Credit spreads should do fine from here. Yields should drive higher and steeper and while I think that some recent market excesses and extreme positioning will continue to work themselves out (bitcoin is below $50k as I type this), the end to the recent volatility is coming closer.
As Bud Fox says, “Life all comes down to a few moments” and I think that we need the courage to ride this paradigm shift through and accept inflation as just a part of that goal! Be vigilant for signs of stagflation, but don’t kowtow to ill-informed soundbites.
"I Can't Even Save": Americans Are Getting Absolutely Crushed Under Enormous Debt Load
While Joe Biden insists that Americans are doing great - suggesting in his State of the Union Address last week that "our economy is the envy of the world," Americans are being absolutely crushed by inflation (which the Biden admin blames on 'shrinkflation' and 'corporate greed'), andof course - crippling debt.
The signs are obvious. Last week we noted that banks' charge-offs are accelerating, and are now above pre-pandemic levels.
...and leading this increase are credit card loans - with delinquencies that haven't been this high since Q3 2011.
On top of that, while credit cards and nonfarm, nonresidential commercial real estate loans drove the quarterly increase in the noncurrent rate, residential mortgages drove the quarterly increase in the share of loans 30-89 days past due.
And while Biden and crew can spin all they want, an average of polls from RealClear Politics shows that just 40% of people approve of Biden's handling of the economy.
Crushed
On Friday, Bloomberg dug deeper into the effects of Biden's "envious" economy on Americans - specifically, how massive debt loads (credit cards and auto loans especially) are absolutely crushing people.
Two years after the Federal Reserve began hiking interest rates to tame prices, delinquency rates on credit cards and auto loans are the highest in more than a decade. For the first time on record, interest payments on those and other non-mortgage debts are as big a financial burden for US households as mortgage interest payments.
According to the report, this presents a difficult reality for millions of consumers who drive the US economy - "The era of high borrowing costs — however necessary to slow price increases — has a sting of its own that many families may feel for years to come, especially the ones that haven’t locked in cheap home loans."
The Fed, meanwhile, doesn't appear poised to cut rates until later this year.
According to a February paper from IMF and Harvard, the recent high cost of borrowing - something which isn't reflected in inflation figures, is at the heart of lackluster consumer sentiment despite inflation having moderated and a job market which has recovered (thanks to job gains almost entirely enjoyed by immigrants).
In short, the debt burden has made life under President Biden a constant struggle throughout America.
"I’m making the most money I've ever made, and I’m still living paycheck to paycheck," 40-year-old Denver resident Nikki Cimino told Bloomberg. Cimino is carrying a monthly mortgage of $1,650, and has $4,000 in credit card debt following a 2020 divorce.
"There's this wild disconnect between what people are experiencing and what economists are experiencing."
CBS: Do you attribute the inflation crisis to the pandemic or Biden?
WISCONSIN VOTER: "It's been YEARS now since the pandemic — I'm not buying that anymore. At first I did; I'm not buying that anymore because yogurt is STILL going up in price!" pic.twitter.com/apahb65scB
What's more, according to Wells Fargo, families have taken on debt at a comparatively fast rate - no doubt to sustain the same lifestyle as low rates and pandemic-era stimmies provided. In fact, it only took four years for households to set a record new debt level after paying down borrowings in 2021 when interest rates were near zero.
Meanwhile, that increased debt load is exacerbated by credit card interest rates that have climbed to a record 22%, according to the Fed.
[P]art of the reason some Americans were able to take on a substantial load of non-mortgage debt is because they’d locked in home loans at ultra-low rates, leaving room on their balance sheets for other types of borrowing. The effective rate of interest on US mortgage debt was just 3.8% at the end of last year.
Yet the loans and interest payments can be a significant strain that shapes families’ spending choices. -Bloomberg
And of course, the highest-interest debt (credit cards) is hurting lower-income households the most, as tends to be the case.
The lowest earners also understandably had the biggest increase in credit card delinquencies.
"Many consumers are levered to the hilt — maxed out on debt and barely keeping their heads above water," Allan Schweitzer, a portfolio manager at credit-focused investment firm Beach Point Capital Management told Bloomberg. "They can dog paddle, if you will, but any uptick in unemployment or worsening of the economy could drive a pretty significant spike in defaults."
"We had more money when Trump was president," said Denise Nierzwicki, 69. She and her 72-year-old husband Paul have around $20,000 in debt spread across multiple cards - all of which have interest rates above 20%.
During the pandemic, Denise lost her job and a business deal for a bar they owned in their hometown of Lexington, Kentucky. While they applied for Social Security to ease the pain, Denise is now working 50 hours a week at a restaurant. Despite this, they're barely scraping enough money together to service their debt.
The couple blames Biden for what they see as a gloomy economy and plans to vote for the Republican candidate in November. Denise routinely voted for Democrats up until about 2010, when she grew dissatisfied with Barack Obama’s economic stances, she said. Now, she supports Donald Trump because he lowered taxes and because of his policies on immigration. -Bloomberg
Meanwhile there's student loans - which are not able to be discharged in bankruptcy.
"I can't even save, I don't have a savings account," said 29-year-old in Columbus, Ohio resident Brittany Walling - who has around $80,000 in federal student loans, $20,000 in private debt from her undergraduate and graduate degrees, and $6,000 in credit card debt she accumulated over a six-month stretch in 2022 while she was unemployed.
"I just know that a lot of people are struggling, and things need to change," she told the outlet.
The only silver lining of note, according to Bloomberg, is that broad wage gains resulting in large paychecks has made it easier for people to throw money at credit card bills.
Yet, according to Wells Fargo economist Shannon Grein, "As rates rose in 2023, we avoided a slowdown due to spending that was very much tied to easy access to credit ... Now, credit has become harder to come by and more expensive."
According to Grein, the change has posed "a significant headwind to consumption."
Then there's the election
"Maybe the Fed is done hiking, but as long as rates stay on hold, you still have a passive tightening effect flowing down to the consumer and being exerted on the economy," she continued. "Those household dynamics are going to be a factor in the election this year."
Meanwhile, swing-state voters in a February Bloomberg/Morning Consult poll said they trust Trump more than Biden on interest rates and personal debt.
Reverberations
These 'headwinds' have M3 Partners' Moshin Meghji concerned.
"Any tightening there immediately hits the top line of companies," he said, noting that for heavily indebted companies that took on debt during years of easy borrowing, "there's no easy fix."
Sylvester researchers, collaborators call for greater investment in bereavement care
MIAMI, FLORIDA (March 15, 2024) – The public health toll from bereavement is well-documented in the medical literature, with bereaved persons at greater…
MIAMI, FLORIDA (March 15, 2024) – The public health toll from bereavement is well-documented in the medical literature, with bereaved persons at greater risk for many adverse outcomes, including mental health challenges, decreased quality of life, health care neglect, cancer, heart disease, suicide, and death. Now, in a paper published in The Lancet Public Health, researchers sound a clarion call for greater investment, at both the community and institutional level, in establishing support for grief-related suffering.
Credit: Photo courtesy of Memorial Sloan Kettering Comprehensive Cancer Center
MIAMI, FLORIDA (March 15, 2024) – The public health toll from bereavement is well-documented in the medical literature, with bereaved persons at greater risk for many adverse outcomes, including mental health challenges, decreased quality of life, health care neglect, cancer, heart disease, suicide, and death. Now, in a paper published in The Lancet Public Health, researchers sound a clarion call for greater investment, at both the community and institutional level, in establishing support for grief-related suffering.
The authors emphasized that increased mortality worldwide caused by the COVID-19 pandemic, suicide, drug overdose, homicide, armed conflict, and terrorism have accelerated the urgency for national- and global-level frameworks to strengthen the provision of sustainable and accessible bereavement care. Unfortunately, current national and global investment in bereavement support services is woefully inadequate to address this growing public health crisis, said researchers with Sylvester Comprehensive Cancer Center at the University of Miami Miller School of Medicine and collaborating organizations.
They proposed a model for transitional care that involves firmly establishing bereavement support services within healthcare organizations to ensure continuity of family-centered care while bolstering community-based support through development of “compassionate communities” and a grief-informed workforce. The model highlights the responsibility of the health system to build bridges to the community that can help grievers feel held as they transition.
The Center for the Advancement of Bereavement Care at Sylvester is advocating for precisely this model of transitional care. Wendy G. Lichtenthal, PhD, FT, FAPOS, who is Founding Director of the new Center and associate professor of public health sciences at the Miller School, noted, “We need a paradigm shift in how healthcare professionals, institutions, and systems view bereavement care. Sylvester is leading the way by investing in the establishment of this Center, which is the first to focus on bringing the transitional bereavement care model to life.”
What further distinguishes the Center is its roots in bereavement science, advancing care approaches that are both grounded in research and community-engaged.
The authors focused on palliative care, which strives to provide a holistic approach to minimize suffering for seriously ill patients and their families, as one area where improvements are critically needed. They referenced groundbreaking reports of the Lancet Commissions on the value of global access to palliative care and pain relief that highlighted the “undeniable need for improved bereavement care delivery infrastructure.” One of those reports acknowledged that bereavement has been overlooked and called for reprioritizing social determinants of death, dying, and grief.
“Palliative care should culminate with bereavement care, both in theory and in practice,” explained Lichtenthal, who is the article’s corresponding author. “Yet, bereavement care often is under-resourced and beset with access inequities.”
Transitional bereavement care model
So, how do health systems and communities prioritize bereavement services to ensure that no bereaved individual goes without needed support? The transitional bereavement care model offers a roadmap.
“We must reposition bereavement care from an afterthought to a public health priority. Transitional bereavement care is necessary to bridge the gap in offerings between healthcare organizations and community-based bereavement services,” Lichtenthal said. “Our model calls for health systems to shore up the quality and availability of their offerings, but also recognizes that resources for bereavement care within a given healthcare institution are finite, emphasizing the need to help build communities’ capacity to support grievers.”
Key to the model, she added, is the bolstering of community-based support through development of “compassionate communities” and “upskilling” of professional services to assist those with more substantial bereavement-support needs.
The model contains these pillars:
Preventive bereavement care –healthcare teams engage in bereavement-conscious practices, and compassionate communities are mindful of the emotional and practical needs of dying patients’ families.
Ownership of bereavement care – institutions provide bereavement education for staff, risk screenings for families, outreach and counseling or grief support. Communities establish bereavement centers and “champions” to provide bereavement care at workplaces, schools, places of worship or care facilities.
Resource allocation for bereavement care – dedicated personnel offer universal outreach, and bereaved stakeholders provide input to identify community barriers and needed resources.
Upskilling of support providers – Bereavement education is integrated into training programs for health professionals, and institutions offer dedicated grief specialists. Communities have trained, accessible bereavement specialists who provide support and are educated in how to best support bereaved individuals, increasing their grief literacy.
Evidence-based care – bereavement care is evidence-based and features effective grief assessments, interventions, and training programs. Compassionate communities remain mindful of bereavement care needs.
Lichtenthal said the new Center will strive to materialize these pillars and aims to serve as a global model for other health organizations. She hopes the paper’s recommendations “will cultivate a bereavement-conscious and grief-informed workforce as well as grief-literate, compassionate communities and health systems that prioritize bereavement as a vital part of ethical healthcare.”
“This paper is calling for healthcare institutions to respond to their duty to care for the family beyond patients’ deaths. By investing in the creation of the Center for the Advancement of Bereavement Care, Sylvester is answering this call,” Lichtenthal said.
Follow @SylvesterCancer on X for the latest news on Sylvester’s research and care.
# # #
Article Title: Investing in bereavement care as a public health priority
DOI: 10.1016/S2468-2667(24)00030-6
Authors: The complete list of authors is included in the paper.
Funding: The authors received funding from the National Cancer Institute (P30 CA240139 Nimer) and P30 CA008748 Vickers).
Disclosures: The authors declared no competing interests.
# # #
Journal
The Lancet Public Health
DOI
10.1016/S2468-2667(24)00030-6
Article Title
Investing in bereavement care as a public health priority
Copper Soars, Iron Ore Tumbles As Goldman Says "Copper's Time Is Now"
After languishing for the past two years in a tight range despite recurring speculation about declining global supply, copper has finally broken out, surging to the highest price in the past year, just shy of $9,000 a ton as supply cuts hit the market; At the same time the price of the world's "other" most important mined commodity has diverged, as iron ore has tumbled amid growing demand headwinds out of China's comatose housing sector where not even ghost cities are being built any more.
Copper surged almost 5% this week, ending a months-long spell of inertia, as investors focused on risks to supply at various global mines and smelters. As Bloomberg adds, traders also warmed to the idea that the worst of a global downturn is in the past, particularly for metals like copper that are increasingly used in electric vehicles and renewables.
Yet the commodity crash of recent years is hardly over, as signs of the headwinds in traditional industrial sectors are still all too obvious in the iron ore market, where futures fell below $100 a ton for the first time in seven months on Friday as investors bet that China’s years-long property crisis will run through 2024, keeping a lid on demand.
Indeed, while the mood surrounding copper has turned almost euphoric, sentiment on iron ore has soured since the conclusion of the latest National People’s Congress in Beijing, where the CCP set a 5% goal for economic growth, but offered few new measures that would boost infrastructure or other construction-intensive sectors.
As a result, the main steelmaking ingredient has shed more than 30% since early January as hopes of a meaningful revival in construction activity faded. Loss-making steel mills are buying less ore, and stockpiles are piling up at Chinese ports. The latest drop will embolden those who believe that the effects of President Xi Jinping’s property crackdown still have significant room to run, and that last year’s rally in iron ore may have been a false dawn.
Meanwhile, as Bloomberg notes, on Friday there were fresh signs that weakness in China’s industrial economy is hitting the copper market too, with stockpiles tracked by the Shanghai Futures Exchange surging to the highest level since the early days of the pandemic. The hope is that headwinds in traditional industrial areas will be offset by an ongoing surge in usage in electric vehicles and renewables.
And while industrial conditions in Europe and the US also look soft, there’s growing optimism about copper usage in India, where rising investment has helped fuel blowout growth rates of more than 8% — making it the fastest-growing major economy.
In any case, with the demand side of the equation still questionable, the main catalyst behind copper’s powerful rally is an unexpected tightening in global mine supplies, driven mainly by last year’s closure of a giant mine in Panama (discussed here), but there are also growing worries about output in Zambia, which is facing an El Niño-induced power crisis.
On Wednesday, copper prices jumped on huge volumes after smelters in China held a crisis meeting on how to cope with a sharp drop in processing fees following disruptions to supplies of mined ore. The group stopped short of coordinated production cuts, but pledged to re-arrange maintenance work, reduce runs and delay the startup of new projects. In the coming weeks investors will be watching Shanghai exchange inventories closely to gauge both the strength of demand and the extent of any capacity curtailments.
“The increase in SHFE stockpiles has been bigger than we’d anticipated, but we expect to see them coming down over the next few weeks,” Colin Hamilton, managing director for commodities research at BMO Capital Markets, said by phone. “If the pace of the inventory builds doesn’t start to slow, investors will start to question whether smelters are actually cutting and whether the impact of weak construction activity is starting to weigh more heavily on the market.”
* * *
Few have been as happy with the recent surge in copper prices as Goldman's commodity team, where copper has long been a preferred trade (even if it may have cost the former team head Jeff Currie his job due to his unbridled enthusiasm for copper in the past two years which saw many hedge fund clients suffer major losses).
As Goldman's Nicholas Snowdon writes in a note titled "Copper's time is now" (available to pro subscribers in the usual place)...
... there has been a "turn in the industrial cycle." Specifically according to the Goldman analyst, after a prolonged downturn, "incremental evidence now points to a bottoming out in the industrial cycle, with the global manufacturing PMI in expansion for the first time since September 2022." As a result, Goldman now expects copper to rise to $10,000/t by year-end and then $12,000/t by end of Q1-25.’
Here are the details:
Previous inflexions in global manufacturing cycles have been associated with subsequent sustained industrial metals upside, with copper and aluminium rising on average 25% and 9% over the next 12 months. Whilst seasonal surpluses have so far limited a tightening alignment at a micro level, we expect deficit inflexions to play out from quarter end, particularly for metals with severe supply binds. Supplemented by the influence of anticipated Fed easing ahead in a non-recessionary growth setting, another historically positive performance factor for metals, this should support further upside ahead with copper the headline act in this regard.
Goldman then turns to what it calls China's "green policy put":
Much of the recent focus on the “Two Sessions” event centred on the lack of significant broad stimulus, and in particular the limited property support. In our view it would be wrong – just as in 2022 and 2023 – to assume that this will result in weak onshore metals demand. Beijing’s emphasis on rapid growth in the metals intensive green economy, as an offset to property declines, continues to act as a policy put for green metals demand. After last year’s strong trends, evidence year-to-date is again supportive with aluminium and copper apparent demand rising 17% and 12% y/y respectively. Moreover, the potential for a ‘cash for clunkers’ initiative could provide meaningful right tail risk to that healthy demand base case. Yet there are also clear metal losers in this divergent policy setting, with ongoing pressure on property related steel demand generating recent sharp iron ore downside.
Meanwhile, Snowdon believes that the driver behind Goldman's long-running bullish view on copper - a global supply shock - continues:
Copper’s supply shock progresses. The metal with most significant upside potential is copper, in our view. The supply shock which began with aggressive concentrate destocking and then sharp mine supply downgrades last year, has now advanced to an increasing bind on metal production, as reflected in this week's China smelter supply rationing signal. With continued positive momentum in China's copper demand, a healthy refined import trend should generate a substantial ex-China refined deficit this year. With LME stocks having halved from Q4 peak, China’s imminent seasonal demand inflection should accelerate a path into extreme tightness by H2. Structural supply underinvestment, best reflected in peak mine supply we expect next year, implies that demand destruction will need to be the persistent solver on scarcity, an effect requiring substantially higher pricing than current, in our view. In this context, we maintain our view that the copper price will surge into next year (GSe 2025 $15,000/t average), expecting copper to rise to $10,000/t by year-end and then $12,000/t by end of Q1-25’
Another reason why Goldman is doubling down on its bullish copper outlook: gold.
The sharp rally in gold price since the beginning of March has ended the period of consolidation that had been present since late December. Whilst the initial catalyst for the break higher came from a (gold) supportive turn in US data and real rates, the move has been significantly amplified by short term systematic buying, which suggests less sticky upside. In this context, we expect gold to consolidate for now, with our economists near term view on rates and the dollar suggesting limited near-term catalysts for further upside momentum. Yet, a substantive retracement lower will also likely be limited by resilience in physical buying channels. Nonetheless, in the midterm we continue to hold a constructive view on gold underpinned by persistent strength in EM demand as well as eventual Fed easing, which should crucially reactivate the largely for now dormant ETF buying channel. In this context, we increase our average gold price forecast for 2024 from $2,090/toz to $2,180/toz, targeting a move to $2,300/toz by year-end.
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