Market Blogs

6/5/23

Re: Economic Decline by 1,000 Papercuts

All,

With the emergence of a US Debit Ceiling strategy last week our Nation selected a direction of fiscal performance for numerous upcoming years. Unfortunately, what was selected leads to printing trillions of additional dollars, a devaluation of the nation’s currency, and ultimately an economic death inflicted by thousands of seemingly unrelated minor events we will be referring to as “paper cuts” in this article. The upcoming round of paper cuts will commence as the Fed reverses course from the rate increase pause many financial writers anticipated to emerge across the summer months of 2023. An article in today’s Wall Street Journal notes the rate pause will likely not materialize as a case of further increases develops at a rapid pace. In addition, a second article appearing today’s edition of the Wall Street Journal is reporting May data showed a strong labor market (in spite of mounting layoffs and retail bankruptcies) which will offer the Fed further necessary evidence to come through with a rate hike later this week. All the current data adds up to a culmination of systemic failures working against our economic engines of opportunity in both domestic and global terms. An article in today’s edition of The South African highlights the fruits of changes discussed above as a can of Pringles in the nation that previously cost R19.99 about 4 months back is now selling for R40.00. As such, today’s edition of the Wall Street Journal included an article noting commodities, particularly metals and energy, (natural gas) are on the decline. We have been speaking of slipping metals pricing for the last 5 weeks and last week we provided references from an offshore news source speaking of declining demand for natural gas across Europe and Germany in particular. However, the pattern is also emerging in America. US Energy and Natural Gas broker Constellation Energy noted earlier today in their monthly report that US gas storage inventories are running 29% higher than at this point last year, and 17% higher than the 5-year average. Why would more gas be going into storage? The answer is simple, because it’s not being consumed by economic activity or cooling to drive demand at power plants. The gas data also closely coincides with the declining commodities pricing referenced by the Journal today. However, the situation is not as Grim across certain Eastern Bloc Nations.

Russia, in particular, is prospering thanks to US-imposed sanctions which have driven over 30 nations toward acceptance of the alternate nondollar denominated BRICS financial system. As we have written about in the past, especially combined with the Turkish president remaining in power this system will eventually extract a direct impact on metals trade and pricing. RT, a Russian news source (please take with a grain of sand as propaganda is real) is reporting national unemployment has fallen to an all time low of 3.3% as of last week. Considering the impact of sanctions and BRICS creating some very non-traditional financial alliances we tend to believe Russia may actually receiving benefit as a direct result of US sanctions which is capable of driving the nations employment to record low levels. We will need to keep on eye on this trend as major implications for the aluminum markets exist in alignment with the growing trade volumes occurring as BRICS transactions.

As such, it should come as no surprise that Deutsche Bank is predicting a mass of looming defaults for corporations across the US and EU in the coming months. The bank is anticipating a default rate of 9% for high yield debit across the nation, and 11.3% for US-based Loans setting the stage for interesting times in our country. The next shoe to fall will be a rise in oil pricing based on upcoming OPEC production cuts. Look for US gas and diesel pricing to begin rising in the later portion of June heading into July. Also, as the volume of available workers remains a concern across the US. We should be aware of falling birth rates across the US which speaks to labor availability in the years to come. Today’s edition of the Wall Street Journal notes birth rates plummeting globally, especially in the US and China. Less people equates with less future consumption, and that my friends holds an impact for future metals pricing trends.

As such, continue to hold purchase volumes to immediate needs only. Today’s numbers are likely to be replaced by lower numbers tomorrow and CME data curves are presently presenting similar trends looking out multiple months. However, be aware of compounding interest rates in the months ahead altering holding cost structures, and leading to a devaluation of US currency under the weight of such inflation that will be soon approaching the neighborhood of a 3% decline in purchasing power per month like the pringles example in South Africa.

5/30/23

Re: De-Industrialization, it’s a Gas!

All,

In previous issues, we wrote somewhat extensively regarding the trend of Europe’s existing industrial base (which includes numerous produces of metals and specialty alloys) falling into a state of limited capacity utilization combined with faltering market sales opportunities. Recently released financial data unfortunately supports our position regarding the economic trends certain to accompany Europe’s deindustrialization. An article appearing courtesy of the US Fed Stats Office on 5/25 notes Germany entered full-on recession in Q1 of 2023 with the economy contracting by .3%. In addition, Germany’s household consumption fell by 1.2% during this same period meaning less electronics, personal care items, and durable goods were purchased within the nation. A further reflection of these developing trends is present across the region’s consumption of natural gas. Gas storage positions in Europe are presently running near 66% full according to an article recently appearing in Bloomberg and cited by Russia Today on 5/30/23. In fact, traders in select areas of Europe are anticipating prompt market gas pricing may soon run negative due to slack demand combined with a lack of storage sites willing to take on additional volume this early in the season. The excess gas points to a growing list of economic woes across the region. The same woes developing in Europe are also headed to China in the form of stagnating consumer demand.

Today’s edition of the Wall Street Journal suggests China’s economic recovery is faltering. If we consider the economic engines of Europe and China suddenly slowing, we find the fitting framework of support for the changes rippling across numerous metals markets over the past 5 weeks with iron ore, coking coal, nickel, zinc, and copper all softening substantially. When metals trade in both physical and paper realms a cooling of the physical demand will hit the paper side of transactions meaning the emergence of what we view as inflation metals dropping in price in spite of rampant inflationary forces operating concurrently around the globe. The reality is physical demand support drives market premiums. When demand falters and economies cool fiscal outlooks sour. As such, noting is sourer than the downgrade of a nation’s financial prospects. As debit ceiling discussions loom, the US is facing just that situation.

On 5/26/23 the South China Morning Post reported China Chengxin International Credit Rating agency downgraded US debit from AAg+ to AAAg citing high inflation and the debit ceiling wrangling as rational for the fiscal update. However, our readers should know Moody’s holds a minority stake in the China Chengxin International Credit Ratings group meaning another major credit ratings agency provided defacto support of the US downgrade. Fitch is also presently considering a downgrade according to today’s edition of the Wall Street Journal. Such maneuvers spell trouble ahead for our economy and we believe it will emerge regardless of debit ceiling discussion outcomes.

However, not all metals news is bad this week. In Turkey, Erdogan managed to hold onto power winning his re-election bid. Continuity of Turkish leadership will equate with continued support for US scrap exports. In addition, we anticipate an economic shift is in store for the nation as BRICS heats up with added global support. Turkey is presently dealing with rampant inflation which will continue to be a challenge for the nation until they move toward a gold-based currency with a growing range of international acceptance. A new currency standard may bolster financial outcomes for the nation, but would also spell trouble ahead for the dollar globally which will ultimately complicate offshore metals transactions for US importers.

In the meantime, look for declining prices across the short and mid-term months. Demand, inflation, and trade issues will be paramount to longevity of our next developing market cycle. Also, look for shortages on physical materials in the aluminum market as Russia supply LME issues play out and US domestic production constrains come to call (notice rebound in LME premiums today?). As such, now that you are ready to take control of your company’s financial future reach out to put our experience and prowess to work for you.

5/22/23

Re: Troubling Trends

All,

Individuals monitoring global financial wrangling along with savvy Star Wars Fans may sense a “disturbance in the force” as pricing on a variety of metals continues to deteriorate in spite of prevailing inflationary forces. In fact, another round of favorable retail sales results were just reported in a CNBC article appearing on 5/16/2023. However, we are betting these media pundits failed to account for the poor results recently posted by Target and Home Depot which act as canaries in the mine for many in the financial industries. Target net income dropped to $950 million from 1.01 Billion in the same period last year according to CNBC.com. In addition, Target is presently contending with theft losses anticipated to exceed 500 million dollars in 2023 according to the NYPost.com. Your authors propose healthy economies do not see ½-a-billion dollars in theft losses at a major retailer. To further reinforce these points, our favorite investment guru Pluto reached out last week Tuesday to discuss how Home Depot results serve as a bellwether stock for both consumer demand and housing at large, both of which, may be facing serious challenges. In fact, Today’s wall street journal hinted at our recent discussions of weakness in the commercial real estate sector noting investors are short selling major landlords across the nation. As such, an impact is to be anticipated across metals families later this year which brings us to the present discussion surrounding the US Debit Ceiling.

Our present predicament is not the first time US Sovereign debit faced the headwinds of a crisis. An article appearing in the Globalist.com dated January 16, 2013 notes the US has faced no less than 5 similar situations all of which impacted prevailing interest rates, and subsequently the pricing of goods. The first occurrence was in 1790 when George Washington signed the funding act of 1790 which deferred war interest payments due that year until 1801. The second incident was the 1861 default in which US dollars which were supposed to be redeemable for gold in 1862 were instead labeled legal tender while gold redemption was cancelled. The third incident occurred in 1933 while FDR was president. Again, war bonds were involved with 1917 bonds reaching their maturity for gold redemption. In this instance, Congress derailed gold payments by passing a resolution to, “Assure uniform value to the coins and currencies of the US” thus ending a crisis where ethe US did not have enough gold reserves to cover the debit issued. The fourth incident occurred in 1979 during the Carter administration which is noted for exceptionally high inflation. A technical glitch with word processing software led to a failure to pay on approximately 4,000 treasury checks that had matured. The glitch resulted in an abrupt interest rate increase of 60 basis points overnight according to a recent Business Insider article. The fifth incident occurred in 2013 during the Obama administration and is very similar to what we are presently experiencing. Essentially, the debit limit was hit, and the Fed employed “exceptional accounting” practices to continue making payments by pulling funds away from departments and services labeled non-essential to government operations. In all of the instances above, higher prevailing interest rates resulted across the economy as the situations played out. Your authors anticipate the present debit ceiling situation to be no different than these others. We anticipate the emergent trends developing across the metals complex agree. We noted in past weeks substantial pricing drops occurring in copper and white metals… We anticipate the drops reflect anticipation of sweeping demand reductions as consumers and governments readjust their spending habits.

Our present demand contraction economic theory finds support in numerous respected places. AMM.com recently noted a dim met coal outlook which corresponds to our weekly results from monitoring Barchart’s Australian Coking Coal Index across the past 4 weeks. In addition, private discussions with several steel executives last week also support scenarios where demand cools on the heels of rising rates. It appears one contact in the steel industry thinks late summer to early fall could see HRC pricing sinking to 700’s or possibly even lower below by later in the year. Time will tell just how hard rates cool market pricing. Production capacity utilization also plays into the riddle and numbers continue to post gains this year. As such, your authors in addition to a few HRC indices think upper-to-mid 700’s are possible, but not much below. However, if something geopolitical develops further, markets could make radical changes to prevailing demand and mill operating rate predictions. We are already seeing quite a few inflation metals (nickel, Aluminum, Zinc, CU) faltering while the precious metals complex gains additional altitude. We suggest a fundamental market shift is beginning to develop. The question is where will it lead us and when does it fully unfold?

5/30/23

Re: De-Industrialization, it’s a Gas!

All,