Copper, like many other assets, has been on a tear lately. From the March 2020 lows through mid-July 2020, the copper price (as represented by Comex front-month copper futures) rose almost 50%.
There is a widespread belief that rising copper prices are a signal for global growth. This makes sense historically because of copper’s natural role in the world.
Copper has a nickname, “Dr. Copper,” because it is “the metal with a Ph.D. in economics.”
The idea is that copper has so many uses, from commercial to retail to industrial, that the price of copper is an economic growth barometer for how much “stuff” is being manufactured, or how much new construction is underway.
Then, too, copper is everywhere. The average U.S. automobile has more than 50 pounds of copper inside, 80% of it used for electrical components. The average single-family home, meanwhile, uses 439 pounds of copper. One can only imagine how much goes into buildings.
As a result of this, investors like it when the copper price rises.
“Surging Copper Prices Signal Optimism About Global Growth,” a Wall Street Journal headline reads.
“Global investors are piling into bullish wagers on copper prices,” the WSJ reports, “sparking the quickest rally in the industrial metal in years and signaling that many money managers remain hopeful about the economic outlook despite rising coronavirus cases in much of the U.S.”
We are bullish on copper, too, and have been so for a while. In mid-June, we took a good-sized position in one of the world’s largest copper miners for TradeSmith Decoder. The position is up nearly 30% as of this writing.
But we aren’t bullish on copper due to a rosy global growth outlook. Quite the opposite, in fact. We are bullish on copper because the growth outlook is singularly awful. The growth outlook is bad to an unprecedented degree and threatens to remain so for years — which is exactly why governments will step up dramatically.
To understand the logic here, think back to the 1930s, and the historic actions undertaken by President Franklin Delano Roosevelt (FDR) to get the U.S. economy moving again.
A mainstay of the FDR plan was large-scale public works projects. This meant giant sums of money, spent by the U.S. government, in the name of building or repairing infrastructure and creating jobs.
In the years ahead, we see the FDR plan being adopted not just in the United States, but in multiple other Western countries, too (if not countries all over the world).
Governments everywhere, desperate for economic activity in the presence of 1930s-style conditions, will open their wallets to fund public works.
The plans are already being announced.
- In the United States, the Joseph R. Biden campaign has announced a $2 trillion green energy plan, geared towards creating millions of union jobs. At the same time, Bloomberg reported on June 15 that “The Trump administration is preparing a nearly $1 trillion infrastructure proposal as part of its push to spur the world’s largest economy back to life.”
- In Britain, Prime Minister Boris Johnson gave a speech on June 30 offering a “New Deal” to the British people, deliberately invoking the FDR term.
- In Germany — a notoriously frugal country — an emergency fiscal response was announced in June that equates to 13.3% of German GDP. This came on top of earlier plans, announced in January 2020, to spend $96 billion on rail projects.
Think of all the copper that will be used, and all of the funds that will be spent, when governments go “all in” on repairing old infrastructure or replacing it with new projects. The worse the economic outlook gets, the more political imperative these programs will feel.
Then, too, there is China. For decades China has been a ravenous copper user, due to the Chinese government’s addiction to artificial GDP growth.
In most Western countries, Gross Domestic Product (GDP) is a reporting statistic that gives a sense of how an economy is doing, whether it is growing or stagnating, and so on. In China, the process works backwards: The government picks an acceptable GDP target, and orders are given on how to hit it.
Historically, for China, hitting mandated GDP targets has meant eye-bulging amounts of capital expenditure (capex) and new construction, whether productively warranted or not, which is why the country uses so much copper.
China has been trying for years to get away from this addiction to construction — one can only build so many ghost cities and highways to nowhere — but it hasn’t been able to do it. A switch to domestic consumer spending, the thing China needs, is easy to discuss in theory but hard to create in practice.
This means that, as global growth slows, and the costs of “Cold War 2.0” between China and the U.S. begin to mount, China will also become desperate for new growth.
With few attractive options, and export markets shrinking or closing off, they will turn to their old standby — huge volumes of capex — which means the prodigious use of copper.
Against the backdrop as described above, we can also expect the world’s fiat currencies to be steadily debased. The supply of U.S. dollars will steadily expand — but so too, somewhat, will the supply of euros, yen, and renminbi. Such debasement could help the price of copper rise further.
In sum, we agree with investors generally that the copper outlook is bright. But not because the global growth outlook is bullish. Rather, copper looks attractive here because the global growth outlook is dire — and many Western governments, plus China, will tap the FDR-style playbook.