Oil And Copper Plunge Monday – World’s Biggest Economies Are In Trouble

China, the EU and the United States.  The economic engines of the world.  China’s Shanghai Stock Exchange Composite index has plunged 27% since June 5th.  It’s down 3.3% as I write this.

Despite the political rhetoric and Wall Street propaganda, the U.S. and European economies are in recession.   There’s no reason to wait for an official declaration of this in the United States because the majority of the economic reports for at least the last six months have been negative to highly negative.

In the U.S. the economic contraction is led by a marked decline in consumer spending. Recall, retail sales actually declined .9% in December 2014 from November.  If you remove the effect of inflation on this metric, retail sales in December would be down over 2%. Note, this decline occurred in what is supposed to be the biggest spending month of the year.  As a reflection of the rapid decline of the consumer,  factory orders have now declined year over year for seven months in a row (source:  Zerohedge):

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To confirm and corroborate this trend in factory orders, this next chart shows the year over year percent change in rail freight carloads:

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If consumer demand declines, factory orders drop as do rail shipments from ports and factories.

Both of the above metrics are reinforced and confirmed by the action in the Dow Jones Transportation index:

DowJonesTransports

This index encompasses rail and truck freight shipping, UPS and Fed Ex, and other goods transportation companies.   It directly reflects the relative amount of consumer spending and industrial activity in the U.S. economy.   Year-to-date this index has diverged by a significant amount vs.  the Dow and the S&P 500.   This stock sector is telling us that the U.S. economy is tanking.

Monday the market gave us two more very loud signals that the global economy is starting to crash.  First, the price of oil plunged over 7% today:

OIL

Of course, the media propaganda attributed the drop in oil to reports that the U.S. and Iran are close an agreement on Iran’s nuclear program. The implication is that removing the sanctions would unleash a flood of Iranian oil on the global market. But this assertion, if not completely disingenuous, is seeded in complete ignorance. It’s been pretty apparent for several weeks now that the U.S. and Iran were getting close an agreement. All you have to do is listen to the howls coming from Fox News on this subject for  the past several weeks.

No Virginia, the plunge in the price of oil reflects declining global demand relative to global supply.  It’s pretty basic supply/demand economics, something which has proved to be over the heads of Keynesian economists.  In fact, I have suspected that the bounce in the price of oil of since mid-March was induced by a combination of technically-driven hedge fund short-covering and Fed-directed Wall Street intervention.  The motivation behind this price intervention would be to protect the Too Big To Fail Banks who are stuck with $100’s of millions in unsold oil shale company leveraged bank loans.  As long as the price of oil remains at a certain level, distressed oil shale companies can stay current on their interest payments.   A former colleague of mine who trades distressed oil debt agrees with my assessment.

Notwithstanding the US/Iran nuclear agreement “narrative” with regard to Monday’s plunge in the price of oil, the price of copper dropped 4%:

Copper

Just to be clear, Iran is not a significant source for the global supply of copper.  Copper is widely regarded as a bellweather indicator of economic health.  This is because copper is used in applications across most sectors of the economy – housing, factories, electronics – any application that uses wires, etc.   Clearly demand for copper is affected directly and indirectly by consumer spending.   Copper is approaching its low of the year, which is a price level not seen since 2009.

The carnage Monday in the price of oil and copper is significant on several levels.  First and foremost, it tells us that the global economy – including and especially the U.S. economy – is tanking.   Second, it is telling us that, despite the extreme effort by Central Banks to prop up the markets and hold the global financial system together, they are beginning to lose control.  There’s just too many holes springing open in the artificial Central Bank “economic dyke.”  Finally, I would suggest that there’s a strong probability that there will be derivatives bombs detonating which are related to Greek sovereign debt, oil shale company debt and a wide array of commodities, especially oil.

Of course, it’s only a matter of time before the Central Banks lose control of the price of precious metals.

14 thoughts on “Oil And Copper Plunge Monday – World’s Biggest Economies Are In Trouble

  1. “Just to be clear, Iran is not a significant source of global copper.”
    LOL. That’s some beautiful satire there, Dave. What would we do without your voice of truth in these times, Mr. Kranzler. Keep it up!

  2. I´m amazed that the PPT can keep the marked proped up it most cost huge sums to buy everything everywhere in order to prevent it from dropping.

    I know that they are using printed money to do this but the sums that they are printing must end up on a balance sheet somewhere.

    I wonder if the PPT is the only player in the market now or if there´s still any other idiots left in the casino maybee there are.

    1. > I know that they are using printed money to do this but the sums that they are printing must end up on a balance sheet somewhere.

      That’s the key point : I think that they are not having any accounting any more.
      Just printing.

      I have been wondering it quite some time now : how is it that noone in the mainstream media or even the alternative blogs talk about this.

      When you are cheating at the border, you get more and more desperate to make your cheating work. I think they have crossed the limit a long time ago.
      They are buying and selling “puts” on gold with UNACCOUNTED fictious money.

      That’s why it can last longer than we think…

      Dave, your opinion on that ?

      Gilles

  3. Always enjoy coming home after a hard day at work and popping
    a couple of TALL BOY’S and reading the number one financial blog.
    The freaking articles you write require me to drink so that I keep
    my blood pressure low. I really don’t want to know all the realities
    of how our country and economy are so screwed up. I always come
    back to read more, like rubber necking a car wreck. You don’t really
    want to look and see all the carnage, you just can’t not look.

  4. Just to add something I’ve observed over in the rural area we live by (Black Hills, South Dakota). The price of diesel is lower than gasoline in this area. I haven’t seen this for a very very long time. I don’t know how this price reversal is occurring elsewhere and haven’t checked data along these lines yet, but I would probably attribute this price reversal to lack of demand for diesel? Further confirmation of consumer purchasing declining, possibly? By the way, this price reversal started about a month ago, give or take.

    1. Guy –
      Just noticed this very same thing on deisel here in the Chicago area this morning.
      Gas at my local station is 2.99 a gal. Deisel at 2.69 a gal. Have not seen THAT in a very long time. What does this portend?

      1. rj chicago-

        I don’t have the crystal ball, but the charts for BDI, containerized index and the North American Trucking index are all pointing down and this sort of cliff diving has been going on for awhile now. Down in Texas, there’s a fella I know that makes runs with his truck and about a month ago, he said that moving product has dropped off a real lot. He confirms others in the trucking business are seeing the same thing. Also, look at other raw materials such as lumber and iron…all trending down quite rapidly. All I can say is that it appears the “consumer” is tapped out due to debt most likely. Another thing that has happened that I have never seen is what the credit card companies are doing in an attempt to get people to buy stuff (I’m 64 so I’ve seen quite a bit, so far, but nothing like we see now). I get credit care apps in the mail (lots of them…more than any other time in my life) whereby they offer such things as “spend $1000 in 3 months and get a credit of $100 to $250 which you can apply to your credit card balance. We take advantage of this all the time…but we never carry a balance. What we “charge” during a month we pay it off with the next statement. Furthermore, we get so many “offers” of balance transfers (never have a balance, by the way) that would give us 12-18 months at 0% interest. Maybe a year or two ago, the length of time for 0% was typically 6 months. What does all this tell us? There is a problem out there and it seems to be escalating.

  5. We sure do need liquidity but we sure don’t need any more debt. Greeks have been finding this out and have discovered the networking of gold based liquidity that comes with no associated debt. The MSM is not aware of this or isn’t saying anything. I heard one elderly Greek man refer to this “underground” movement as “21st century fishes and loaves”.

  6. Waiting for lumber to timmmbbbbbeeeeeerrrrrrrr!. Looks like a no-brainer trade.
    I concur with Dave’s statements about the why the price of oil was being artificially
    supported but wanted to add that also is might also been there to protect the trillions in oil and energy derivatives that are about to collapse! When the hell is gold and silver going to catch a bid, is the question I want to know…

    1. I guess we’re living in those “interesting times” the Chinese refer to. And when was the last time the gold-silver ratio gained 3.5 within a couple hours, as it’s done today?

  7. Tuesday morning, looks like someone needs liquidity and is selling
    in order to raise cash. One billion in notional value in gold, yikes !
    The oil market is getting hammered, how will frackers make their
    interest payments at $50 or sub $50 per barrel. Looks like the
    beginning of 2008 again. Only this time no ability to bailout the
    system.

  8. Just to add a couple of more economic indicators to your list;

    The BDI (Baltic Dry Index) has been bottom bouncing around the 650 level since before the start of the year.
    The DBC (Commodity Tracking Index Fund) has fallen out of bed these past two days!

    When stepping back and looking at the WHOLE global economic/politico scene, one gets a sense of foreboding. As if we know there’s a runaway train coming, approaching a sharp corner before the canyon bridge and we who know, have gathered to watch from a nearby hilltop. We hear it coming closer and is about to crest the rise in the distance. Any moment now.

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