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):
To confirm and corroborate this trend in factory orders, this next chart shows the year over year percent change in rail freight carloads:
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:
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:
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, with many using something similar to super duplex stainless steal needed to help with oil production. 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%:
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.