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0 Nov 11 2010 @ 10:10am by Matt Smith in Capital Markets, Crude Oil, Economy

Between The Devil And The Deep Blue Sea

Cab Calloway originally recorded the song ‘The Devil and the Deep Blue Sea’, which is an apt analogy to where I feel we are at the moment. The devil – i.e. the exuberant rallies we are seeing – appear a rite of passage, while the monkey on my shoulder is tugging my ear and telling me we should be sinking. So here’s two compelling and contrasting illustrations of both cases, which lead me to conclude little else than Cab Calloway is great.

Exhibit A: let’s take a look at the devilish move higher in the commodity, ‘Dr’ copper. Dr Copper is given such a moniker because the hugely important base metal is considered so good at predicting economic trends that it appears to have a Ph.D in economics. So what is our kind doctor telling us? That everything is fan-blarney-tastic, as it reaches an all-time high (in nominal terms). The reason for the rally from such a low in January of last year? Demand from emerging markets, especially China. As this great article from last week illustrates, the transformation in emerging markets of rural to urban consumers is driving copper consumption through the roof:  

Exhibit B: Next up, an oldie but a goodie – we take a look at equities and crude. Double trouble, the gruesome twosome; whatever you want to call them – they are intertwined and rallying on to two-year highs, for an apparent plethora of reasons – QE2 from the Federal Reserve, (some) encouraging economic data, strength in emerging markets, a weaker dollar, increased risk appetite, inflationary concerns, you name it. Sounds pretty compelling when you put it like that:

And it would be if it weren’t for our counterweights; the anchors that keep us grounded. First up for the defense: the Ceridian-UCLA Pulse of Commerce Index. It uses real time diesel usage to measure the flow of goods to U.S. factories, retailers, and consumers – pretty nifty stuff. It is a leading indicator for industrial production (as can be seen on the below chart), and the index has unfortunately fallen for three consecutive months – a pattern not seen since January 2009 (note: Jan 09 = bad. Evidence = the two charts above show prices were so very weak back then). The rolling over in industrial production would not be good, economically or for energy demand. One to watch: 

The second in the tag-team for the double-downers is the underemployment rate. I know I’m sounding like a broken record (not one of Cab’s, I hope), but this rate really, really needs to improve. Despite some minor movement in the last year, it is still at 17%. This means 17% of the US is unemployed, or working in a part-time job (but wish they had a full-time job), or are so discouraged that they have stopped looking. It cannot be expressed emphatically enough how much we need to see this rate drop for the economy to show a sustainable bout of strength:

It is strange times we are living through, when such compelling cases can be made for both sides. As to which direction we will go, I hope for plain sailing, but fear for a shipwreck on the horizon. One thing is for sure; we won’t find out until next year, as we approach the holiday season and the goodwill in markets that it brings. And even if you don’t think we are in-between the devil and the deep blue sea, you must at least admit…it is a cracking tune. ‘Til next time.

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