Diary of a Financier

Macro Headwinds from the East & West

In Economics on Wed 17 Aug 2011 at 18:44
  • German GDP growth now flat, leaving the “engine of the Eurozone” stalled.
  • US Monetary Base eroding again, papered over by the spikes in M1 & M2 from a flight to USD safety.
  • Copper wallowing while SPX recovers. SPX-HG spread has started falling from extreme highs (wides), which has historically been predictive of market crashes.

German GDP came in soft yesterday: 0.1% v 0.5% expected. This from the engine of the Eurozone. Not much more to discuss about Europe. I’ve exhausted the subject; ‘Nuff said:

Germany Real GDP Growth Rate (M/M %change)

Germany Real GDP (EUR Billions)

EMU17 Real GDP (Euro Billions)

I heard the words “Money Supply” today, which prompted me to take a look at all classifications of the US Money Supply. Note a deceleration in the growth of our Monetary Base, indicative of the powerful deflationary forces in the absence of Quantitative Easing:

US Monetary Base- Crescendo & diminuendo in perfect coordination with QE2.

Simultaneously, broader M1 & M2 growth rates have spiked:

US M1

US M2

Those spikes in M1 & M2 are on par with those crisis periods from 2001 & 2008. They’re indicative of a flight to US Dollar denominated demand deposits, savings account deposits, CDs and money market investments. Not too surprising, nor too alarming. US institutions are not leveraging/loaning out the hot inflows–take Bank of New York’s (BNY) 13bp fee on institutional deposits as a sign of banks’ heed. Worth watching these measurements nonetheless.

My last bullet-point of the afternoon: Dr. Copper is tipping its hand again. Below, I’ve overlayed Copper (HG/) and S&P 500 Futures (SP/). On the shorter, daily fractal, notice SP/ having really overshot the downside last week. Subsequently, SPX has recouped some of those exaggerated losses, while HG/ has started to wallow:

HG v SP (monthly)- spread to tighten w SPX outrunning copper to downside.

HG v SP (weekly)- Dr Copper tipping its hand again; stocks trying to recover after oversooting the downside, but copper still wallows.

HG v SP (daily)- SPX still recovering from oversold lows, but copper already slipping–perhaps having already regained equilibrium after the selloff.

In a couple of those charts above, I’ve included a curve that charts the Spread between SPX & Copper.* That spread shows very deterministic waves in the relationship, which peaks before market crashes, troughs before recoveries. It has shied away from recent, historic highs (wides), which were on par with 2007 & 2000 pre-crash markets.

A decline in the spread from today’s historically extreme highs (wides) would suggest Copper outperforms equities henceforth. While that may denote a number of convergence means, it historically connotes a decline in HG/ prices, outrun by a crash in stock prices.

I’d be amiss if I didn’t mention that the spread looks like it has thrown headfakes in the past, plus it topped out at a mere ~1390, as opposed to the extreme 1550 before prior crashes. As with my entire market outlook, it’s all contingent on politics: will QE3/HAMP-lite or fiscal stimulus save the day? Without such exogenous aid, I cannot imagine SPX resuming spread expansion in this short-term cycle.

I reiterate, ‘Nuff said.

–Romeo

*A huge slice of the demand for Copper–more than the heavier speculated precious metals Gold & Silver–comes from industrial application, so “Dr. Copper” has managed to serve as a good leading indicator for the S&P 500 [despite arbs]. Of course, Copper conveys the “store value” kicker of its precious metal compatriots. An illustrative example of the store value comes from charting the Ratio of SPX/Copper, which has declined like a graph of exponential decay since peaking in 1999. This decay is anecdotally attributable to the debasement of fiat, triggering the rebellious rally in precious metals.

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