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Tuesday, 12 December 2017

Red metal draws blood and Europe confronts its agony

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Anthony Peters, SwissInvest Strategist

As recently as Wednesday this week I had looked at copper prices and the way in which the LME cash price had rallied back to the US$7,500/tonne range after the sharp sell-off in September. One of my gurus who is rather unusual as he runs a commodity futures hedge fund out of Anchorage, Alaska, wrote to me that morning: “Keep an eye on copper – I think it is the best leading indicator of where stocks go”. Yikes!

Yesterday, in a single session, the red metal dropped US$475 to close at a 15-month low of US$6,721.50. Indications are for a rebound today, but that will not expunge the pain of such a severe single day  dump.

All the while, the fun and games surrounding the weekend’s summit continue with large parts of the final communiqué being leaked yesterday and the verbal battle between the German and the French camps continuing. I thought they’d told us last week that they were in agreement with respect to the way forward?

The French seem to be making some headway in terms of the leveraging of the EFSF fund although you might as well be trying to pin the tail on the donkey when it comes to the final figures. The most likely ones seem to be either €940bn which would amount to €500bn borrowed against the core fund capital of €440bn or €1.2trn which would see the fund geared up three times. The idea of the former seems to be gaining in popularity as it is smaller and might subsequently be more acceptable to the Germans.

So, having had a world where the private sector was overindebted and we shifted the debt on to the public sector balance sheet, we are now planning to take it off there and to hide it in virtuality. I have a good friend, a former trader, who would frequently say at the end of a bad day “…well, the money’s not lost; it just belongs to somebody else.” The same goes for debts. I have repeatedly been drawn to the biblical parable of the seven lean years and the seven fat years. However, we sadly missed the messages and during the seven fat years from 2000 to 2007 pretty much consumed 14 years of goodies. It might only be three years since it came unstuck but already it is easy to forget the level of consumption and shopping mania which had gripped us all.

I will never forget that muppet female anchor on BBC breakfast television in 2008 who quite seriously looked into the camera and proclaimed: “C’mon, let’s fight this recession – let’s all go out and go shopping…”  In effect, growth has to revert to a sustainable trend and in order to do that it will have to flat-line for seven years while the trend line catches up with reality – or until reality recedes back to the trend line. Markets have become discombobulated, for in this adjustment process index tracking is fast becoming a losing game and active management (or stock-picking if you prefer) is again looking like the most sensible way forward. However, in an industry which has spent pretty much most of the past 10 years anointing mathematicians and statisticians and sidelining fundamentalists, the change in attitude has yet to really take hold.

European stocks had a lousy day on Thursday with Milan shedding 3-3/4% and the Dax dropping 2-1/2% on the back of the suggestion that the summit will not be the final meeting and that they’ve already scheduled the next one for Wednesday. After a wobbly start New York closed in the plus – why, I do not know. I would guess it’s because the fact that they are meeting again in midweek shows that the politicians have grasped that praying and hoping is not a strategy.

On the protesters

I took a bit of a detour to work and drove by St Paul’s Cathedral in the City and past the tented community of anti-capitalist protesters in order to see what has become of the generation which has been fed, watered, educated and transported on my tax money. I was delighted to see that they are trying to save money by not wasting it on silly luxuries like razor blades.

I was delighted to see that they are trying to save money by not wasting it on silly luxuries like razor blades

We used to get very excited in the banks about our “efficiency ratio”, the cost of generating a dollar of revenues. Even with bonuses – no matter how silly some of them were – it never came close to the cost of raising a dollar of tax and then the cost of distributing it again. Taxation is one of the less efficient ways of feeding wealth back into the economy. It is extraordinary how those who want to have a slice of the pie can get one; it is the ones who are waiting to be given one who are happy to be interviewed in front of St Paul’s saying: “We will be here for as long as it takes…” What it is that he is waiting for, he most likely doesn’t know.

Alas, it is that time of the week again. All that remains is for me to wish you and yours a happy and peaceful weekend. May you, your other half and your children agree on who pays for what, for how long and for why and may that set an example to Nick, to Angie and to their wayward Stavros’s, Paddies and Rius, José’s and Giovannis.  

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