Wednesday, December 3, 2008


For the last 12 months I have been following copper as a proxy for world economic growth. As the US weakened in the early part of the year, the BRIC countries remained strong, and decoupling of US growth from global growth had its proponents. This turned out to be proven false, and only came to be widely accepted in the fall.

Copper had made new all time highs as recently as May, 2008, but it could not hold on to them, and in fact, prices reversed back through the breakout point or support levels in August, 2008 confirming the start of the bear market in copper. Coincidentally, this was just prior to the devastation in US stocks and in equities in emerging markets.

On August 4, 2008, I had written an article entitled, "Debunking Global Growth". From the article I quote:

"For months now the hopes of investors have been kept alive by the notion that global growth will bail out the US economy. We are told that global growth has decoupled from the US economy. But I think this theory of decoupling – where the US economy and world economy function independent of each other - will be debunked.

We know the US economy is in a recession or on the brink of one as the GDP numbers and employment data showed this past week. Furthermore, US equities have been in a bear market for 8 months now. We know the US economy has many obstacles to overcome including but not limited to: 1) the housing crisis; 2) the credit crisis; 3) consumer retrenchment; 4) lack of a coherent energy policy; and 5) inflationary pressures. All this is known and unlikely to be worked out anytime soon. But what isn’t widely accepted is that the global growth story is failing as well, and I believe this is the next and newest risk for US equities.

Why do I think that the global growth story is over?"

The answer was copper, our barometer of global growth.

So 4 months later what is copper "saying" about the world economy?

Figure 1 is a monthly chart, and it isn't a pretty picture. Copper is still not showing signs of stabilizing and it continues to make new lows. Furthermore, support levels remain some 30% away!!!

Figure 1. Copper/ monthly

I remain constructive on the US markets in the short term provided key support levels hold. See yesterday's article, "Bull Factor: Reversal of Price Failures". However, when I look at a chart of copper and extrapolate this to the global economy, I can safely say that the US is not on the cusp of a new bull market. Any rally should be of the multi week variety and likely sold at resistance levels.

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