[This blog post is an excerpt from a recent commentary at https://speculative-investor.com/]

Chile is by far the world’s largest copper-producing country, accounting for about 23% of global production. After that we have the Democratic Republic of the Congo (DRC) and Peru. Together, these three countries account for almost 50% of global copper production, a potential major problem in the making.

As discussed in the article posted HERE, the output of Chile’s copper mines is projected to fall 8%-9% this year, which would make 2026 the weakest year for this country’s copper production in at least two decades. Also, the article notes that the slump in Chilean copper production “adds to a string of mine disappointments around the world that have opened the door to the first annual decline in global mined-copper output since 2017, just as demand strengthens with increased investment in data centers and power infrastructure.”

One of the reasons for this year’s decline in Chile’s copper production, and a reason why this country’s production likely will be sub-par again next year, is the Super El Niño. As discussed HERE, “El Niño is weakening the high-pressure system that normally keeps storms away from central Chile, allowing more rain-bearing fronts into the region.” Previously we have focussed on the adverse effects of the Super El Niño on agriculture, but in Chile it also is adversely affecting mining. There may be similar issues in Peru, the world’s third-largest copper-producing country, but even if its copper mines are not impacted by extreme El Niño weather it appears that Peru’s copper production has plateaued.

In the DRC, the world’s second-largest copper-producing country, there could be weather-related reductions to copper output associated with the Super El Niño, but the main threat at the moment is that the country is in the midst of the fastest-growing Ebola outbreak in its history, with more than 10,000 confirmed cases to date. In addition to being a major copper-producing country, the DRC is a major producer of tin, another metal that is critical for the datacentre building boom.

There have been large corrections in the prices of some industrial metals over the past several months, but the following charts show that the prices of copper and tin remain near their highs. This is most likely because production constraints associated with weather and disease are preventing relatively high prices from causing an adequate supply response to rising demand.

We would be bullish on the multi-year prospects for copper and tin based solely on projected demand growth, but adding the aforementioned production problems into the mix makes us even more so.

[This blog post is an excerpt from a recent commentary published at https://speculative-investor.com/]

A month ago, in our previous Recession Watch discussion, we wrote that although there were economic risks associated with the price action in the energy market (the record-high diesel price, in particular) and Trump’s counterproductive international trade policies, it was still the case that none of the most useful US economic indicators were pointing to an imminent recession. Since then the evidence has become more mixed, most likely because the parts of the economy that are benefiting from AI-related investment are very much still in the boom phase, whereas many other parts of the economy are weak.

Turning to the data, the monthly US employment numbers released on Friday 2nd October were weak in absolute terms and relative to expectations but provided almost no useful information about the state of the economy. Traders focus on these numbers, though, because they influence the Fed. Continued Claims for Unemployment Insurance (CCUI) is a better indicator of the state of the labour market and this statistic points to strength, given that the number of people refiling for unemployment insurance is at a 3.5-year low. Here’s the relevant chart:

As an aside, largely in response to lower-than-expected numbers in an inflation report on Wednesday (the PCE Price Index) and the monthly employment report on Friday, the probability — according to the Fed Funds Futures market — of a Fed rate hike at the next FOMC meeting (28th October) plunged over the past week from 64% to 22%. We reiterate that this shift was a response to economic data that influence the Fed but don’t necessarily say much about the actual economy.

Also pointing to a modicum of economic strength is the ISM Manufacturing New Orders Index (NOI), which, as illustrated below, remains near the top of its 4-year range and a long way above the level that it would have to breach (48) to generate a new recession warning.

CCUI and the NOI are on the positive side of the ledger, but we noted above that US economic indicators have become more mixed over the past month. For example, on the negative side of the ledger we have:

1. Some important cyclical sectors of the US stock market recently have been very weak, despite the boom in datacentre construction. The following daily chart of the iShares Transportation ETF (IYT) shows an example. This suggests that many parts of the economy are being hurt more by the high price of diesel and other cost pressures than helped by the AI-related investment boom.

2. The High Yield Index Option Adjusted Spread (HYIOAS) has signalled an upward trend reversal by breaking above its 65-week MA (the blue line on the following chart), that is, credit spreads have begun to widen. This is a necessary but far from a sufficient condition for a recession.

The longer the war in the Middle East continues the more negative will be the consequences for the US economy, the consequences for many other economies around the world having already been severe. Furthermore, as things stand today the war is far more likely to escalate than to end within the next few months. That being said, to borrow a phrase from the world of central banking, we will be data dependent. Regardless of what we think will be the economic consequences of major policy blunders, we will defer to objective indicators that in combination have worked for decades. At this time, these indicators collectively are becoming more negative, but they are not signalling that a recession is imminent.

[This blog post is an excerpt from a commentary published last week at https://speculative-investor.com/]

The ‘super’ El Niño currently underway has contributed and will continue to contribute to extreme weather events or very unusual weather conditions, including reduced rainfall (and potentially severe drought) throughout Asia and an absence of Atlantic hurricanes. One of the likely future effects will be a relatively mild US winter. At least, that has been a result of a strong El Niño in the past. However, as discussed in a recent Bloomberg article, the greater the strength of the current El Niño, the greater the risk that historical weather and climate patterns will not be a reliable guide to the future.

The Bloomberg article linked above points out that traders have been betting for a few months now that a strong El Niño will deliver a mild US winter. Apart from the markets that facilitate direct betting on or hedging of future weather, this has been evident in the US natural gas (NG) futures market, where the total speculator net-short position is at its highest level since March-2020 and not far from a 20-year high.

Partly in response to speculation that the coming winter will be unusually mild, the January-2027 NG futures contract is at its lowest level in more than four years. Here’s a daily chart covering the past 12 months:

A relatively mild winter is the most likely outcome, but with this outcome already factored into current prices there is the potential for even an average winter to bring about a meaningful rally in the NG price. Also, the war in the Middle East has caused the price of NG in Europe to almost triple, resulting in Europe’s benchmark NG price now being almost 9-times the NG price in the US and creating an incentive to export as much Liquefied Natural Gas (LNG) as possible from the US. While this currently does not provide us with a set-up for a short-term NG trade with an attractive risk/reward, additional weakness or sideways movement in the price over the coming 1-2 months could generate such an opportunity.

[This blog post is an excerpt from a recent commentary at https://speculative-investor.com/]

A Fed rate hike won’t enable more ships to go through the SOH or refineries to produce more diesel or farmers to grow more corn. In more general terms, when prices are rising due to supply restrictions, central-bank rate hikes are not a reasonable response. In fact, when the underlying problem is reduced supply due to temporary disruptions, a rate hike by the central bank is not only not part of the correct response but also gets in the way of the actions that are needed to fix the problem. What’s required is investment to increase production, not tighter monetary conditions to clamp down on demand. However, many commentators are arguing that the Fed should hike in September because “inflation is well above the Fed’s target!”.

Unfortunately, most members of the FOMC also fail to account for economic reality and instead react blindly to the high-profile “inflation” numbers and to employment reports that are inaccurate to the point of uselessness. Of course, Trump’s threats against the Fed do not help. That’s because to maintain the appearance of independence, if any members of the FOMC were leaning towards rate cuts (none of them are at the moment), the President’s threats likely would push them in the opposite direction.

So, the situation is that regardless of what caused the increased inflation numbers and what’s the best way to address the issue, the financial markets assume that any economic statistic will make a rate hike more likely if it hints at larger price increases or a stronger economy. Consequently, in response to the latest news, last week the probability assigned by the Fed Funds Futures market to a Fed rate hike at the FOMC meeting on 16th September went from 70% on Tuesday down to 50% on Thursday and back up to 59% on Friday. Gold was the market that was most sensitive to these probability swings.

In effect, at the end of last week the Fed Funds Futures market was assigning a probability of almost 60% to a Fed mistake in the form of a rate hike in mid-September. We will be surprised if this particular mistake is made, but if it is it could be the catalyst for deeper corrections in the gold, equity and currency markets, with the gold price and the SPX dropping and the Dollar Index rising.

[This blog post is an excerpt from a recent commentary at https://speculative-investor.com/]

Many articles and internet posts have referred to the decision by US Treasury Secretary Scott Bessent to double the dollar value of US government debt buybacks from US$2B to US$4B per auction as the “Bessent Put”. The implication is that the US Treasury is trying, via its buybacks, to put a floor under long-term government bond prices, or, looking at it from a different angle, to cap long-term interest rates. This is partly true, but most of the articles we’ve read contain a lot of misinformation. Here are two important considerations/misunderstandings.

First, the assertion that the US Treasury is replacing relatively-low-cost debt with relatively-high-cost debt is wrong or at best misleading. While it is true that the interest rate on the bonds that are repurchased will be much lower than the interest rate on the newly issued debt, the fact that the old debt will be repurchased at a large discount to par means that the cost-to-maturity for the Treasury will not necessarily change. This is because an increase in the interest paid will be offset by a reduction in the principal owed.

Second, what the US treasury is doing is very different from the Yield Curve Control (YCC) carried out by Japan’s monetary authorities. In Japan, the central bank added bonds to its balance sheet (purchased bonds using newly-created bank reserves) to keep bond yields within a certain range. In the US case, however, the central bank has no involvement and the Treasury finances the purchase of old debt by issuing new debt, meaning that there is no creation of additional bank reserves.

The debt buybacks make sense because they address a problem without adding to the US government’s debt burden. The problem they address is that due to interest rates being much higher now than they were several years ago, there are now a lot of bonds on the balance sheets of financial institutions that have become illiquid (these days, nobody wants to own government bonds with sub-2% yields). Furthermore, passive investing is exacerbating the problem, because the lower a bond’s price becomes, the smaller the amount of money that will be allocated to its purchase by passive bond funds*. By replacing this old debt that trades at a large discount with new debt that trades at par, the Treasury simultaneously reliquefies the bond market and reduces the downward pressure on bond prices being exerted by passive investing strategies.

The risk is that by replacing old long-term debt with new short-term debt, the US federal government’s finances become more sensitive to changes in short-term interest rates. In other words, the buybacks will make the government’s financial health more vulnerable to Fed rate hikes. Therefore, it’s likely that in the future even greater political pressure will be brought to bear on the Fed to cut its targeted short-term interest rates.

Bessent’s buyback scheme will not address the main problem, which is that the US government continues to do nothing meaningful to reduce its massive annual budget deficit. On the contrary, both major US political parties agree that the government should do (spend) more, with the only disagreements being over the details. Therefore, the scheme will not end the long-term bear market in government bonds. However, despite the small dollar value currently involved, there’s a good chance that it will work in the short-to-intermediate-term by adding liquidity to the financial markets and removing some of the downward pressure on bond prices.

*It’s the opposite situation to the stock market. In effect, passive investing creates a positive feedback loop, in that it tends to magnify up-moves in securities that are becoming relatively expensive and down-moves in securities that are becoming relatively cheap.

[This blog post is an excerpt from a commentary posted at https://speculative-investor.com/ last week]

In several respects, the past few years have been different from anything in the past. In some cases the reason for the unprecedented outcome is not hard to find. However, while it is always possible to concoct an explanation after the fact, in other cases the reason for the unprecedented outcome remains in doubt.

As an example of an easy-to-find explanation, the fact that the US stock market has become more expensive and more concentrated than ever before is a predictable consequence of the increasing influence of passive investing.

A case where the explanation for the divergence from the historical record is far less clear is the fact that in the US, economic conditions that in the past always were followed by a recession did not lead to a recession. Instead, the economy went from one boom to another with an intervening bust phase that lasted about two years and never became severe enough to qualify as a recession.

One of the many indicators we can use to make the point that this time has been different is charted below. The chart shows that with the exception of the extremely short COVID recession of 2020, which was caused by the government suddenly shutting down a large portion of the economy, every recession (the shaded areas on the chart) since the start of data collection in 1985 was preceded by a sharp downturn in Residential Construction Payrolls (RCP). Furthermore, prior to 2022 there were no multi-year periods in which RCP essentially went sideways. Consequently, the period from 2022 onwards stands out. For the first time, RCP peaked and instead of dropping spent years going sideways near its cycle high.

After the fact, we can come up with three main reasons why the US economy never became weak enough during 2022-2024 to officially enter recession territory. Here they are:

1) The government spent money (provided fiscal stimulus, that is) as if a recession were underway while the economy was still growing, boosting employment and economic activity in the process. However, this alone could have done no more than delay a recession. In addition, it would have increased the severity of the eventual recession.

2) During 2023-2024, the Fed released about 2.5 trillion dollars into the economy from its Reverse Repo Facility. This meant that during a 2-year period in which the Fed supposedly was tightening monetary conditions, it actually was a net injector of liquidity into the financial markets and the economy. However, like the ‘amped up’ government spending, this could have done no more than delay a recession.

3) The combination of items 1) and 2) potentially could have delayed the start of a recession by 1-2 years, but at around the time that their positive short-term effects on the economy would have ended, the AI-related investment boom became big enough to counteract all other negatives. This wasn’t planned or — as far as we know — foreseen by anybody. For policymakers in the government and the central bank, it constituted blind luck of a very rare kind, because it is unprecedented for a new technology to have such a substantial effect on economy-wide economic statistics within such a short period.

The effect of the AI-reflated investment boom has been positive as far as economy-wide measures of economic activity are concerned, but for many individuals the effects to date have not been positive. In particular, the demand for energy and materials from AI-related spending has increased significantly the cost of living for the average person. Consequently, datacentres have become an important political issue.

“It is different this time” is said to be the most dangerous expression in the world of investing. It usually is a dangerous idea to hold, but the fact is that sometimes it really is different.

[This blog post is a brief excerpt from a recent commentary at https://speculative-investor.com/]

In the 10th June Weekly Update we discussed the potential for the El Niño currently underway to become the “super” variety, with major adverse consequences for food production around the world and especially in Asia. Before we provide an update, here’s a brief description of the El Niño and La Niña weather phenomena from the article linked HERE:

“Normally, Pacific trade winds blow west across the equator, carrying warm South American water toward Asia. Cold water then “upwells” from the depths to replace the warmer surface water that’s been pushed away.

El Niño is a natural climate cycle that disrupts this pattern. It’s triggered by weaker-than-usual trade winds — winds that end up allowing much of that warm water to flow back toward the west coast of the Americas.

Ultimately, that warmer water forces the Pacific jet stream — a high-altitude air current that acts as a 7,000-mile “conveyor belt” pushing storms east across the Pacific toward North America — to move south of its usual path, altering weather patterns across the U.S. and the globe.

La Niña is the exact opposite: stronger trade winds, colder water and a Pacific jet stream that moves north rather than south.

El Niño and La Niña happen roughly every two to seven years and last nine to 12 months. El Niño generally arises more frequently than La Niña.”

This year’s El Niño stands a good chance of becoming strong enough to qualify as “super”, meaning that surface temperatures in the Pacific are on track to become much warmer than would be the case in an average El Niño. Super El Niños are relatively rare, typically occurring every 10-20 years. However, as discussed in our 10th June commentary, a Super El Niño combined with other natural climate cycles could result in weather conditions during 2026-2027 being similar to those of 1877-1878, when Asia experienced the worst drought in centuries.

Evidence regarding the likely consequences of the 2026 El Niño will start to become available by August, because by that time it will be possible to make an initial assessment of India’s monsoon season. In particular, much less rainfall than usual in India during June-July (the first two months of the monsoon season) would increase the risk that an event of similar severity to 1877-1878 is in store.

The broad correction in the commodity markets that began in April could continue for a few more months, but as we mentioned last month, a “super El Niño” probably would result in grains and other crops being among the first commodities to resume their longer-term bullish trends. Therefore, over the months ahead we will be looking for opportunities to add more agriculture-related exposure to the TSI Stocks List.

[This blog post is an excerpt from a commentary published last week at https://speculative-investor.com/]

After the war against Iran broke out in late-February, we thought that the oil market was under-estimating the scale of the oil supply problem and that a price of US$150-$200/barrel would likely be seen in the US futures market if the war continued for more than a few weeks. However, by the first half of April — with the war still very much in progress — we thought that the crisis essentially was over and that oil’s price spike to the US$120s in early-March would turn out to be its peak for the year. This was based on the price pattern and the progress of the war. As the oil price subsequently made progressively lower highs and the futures curve flattened, we became more convinced that the early-March peak was, indeed, the intermediate-term variety, while any remaining doubt was removed as soon as the US-Iran MOU was put in place. Some oil market analysts, though, maintained their $200/barrel price forecasts throughout the downward price trend and are still talking-up the short-term risk of a price rise of that magnitude. Why have these forecasts been so wrong and why, in all likelihood, will they continue to be wrong?

After the start of the war, several actions were taken that helped ‘fill the void’ created by the closure of the Strait of Hormuz (SOH). On the supply side, most of these actions were obvious and accounted for in price forecasts. Examples include Saudi Arabia re-routing oil from its east coast to its west coast via pipeline and oil being released from strategic reserves. The mistakes were on the demand side and the biggest of these was to not account for China reducing its oil imports by more than 5M barrels/day.

We started writing about the large reduction in China’s oil imports in early May, which also is when related articles started to appear in the press. But if this information was starting to appear in the mainstream media during the first half of May, it’s reasonable to assume that large traders in the oil market had been aware of it and had acted on it much sooner. In more general terms, when you discover information in the mainstream financial press (Financial Times, Wall St Journal, Bloomberg, etc.), you should assume that the information already is reflected in market prices.

Another mistake worth highlighting is associated with global oil inventories. We keep reading about plummeting inventories and storage tanks rapidly emptying, which creates the impression that the world will soon run out of oil. The reality, though, is that commercial oil inventories are not materially different today than they were at the start of this year. To further explain, there have been large inventory drawdowns, but only in the inventories (strategic reserves) managed by governments. This means that there will be no need to replenish the inventories in a hurry.

An important related point is that the reduction in the US Strategic Petroleum Reserve (SPR) accounts for about 75% of this year’s reduction in global strategic petroleum reserves. This is important because the US does not need a strategic reserve, so the US government could take as long as it wanted to replenish the SPR or simply choose not to replenish it.

Therefore, what’s being touted as a dangerously low inventory situation is a non-issue.

All of which brings us to a critical point: At any given time, the most accurate assessment of the current supply of oil relative to the demand for oil is provided by the slope of the oil futures curve, that is, how contract prices change as delivery months become more distant. The slope of the futures curve tells you the extent to which the market is well supplied, while the change in the slope over time tells you whether the supply situation is becoming tighter or looser. For example, there were times between early-March and early-April when the price of the nearest oil futures contract traded more than $40/barrel above the price of oil for delivery nine months later, indicating a severe shortage of physical oil, but the difference between these contracts has since trended lower and is now only about $3. This suggests that although the oil supply situation is still tight, the extent of the tightness has reduced dramatically. Moreover, it continues to move in the direction of increasing abundance.

Summing up, when it comes to assessing current oil supply relative to demand, the futures curve is vastly superior to any analyst.

[This blog post is a slightly modified excerpt from a commentary published at https://speculative-investor.com/ last week]

Assuming that the US-Iran Memorandum of Understanding (MOU) remains in effect and the Strait of Hormuz (SOH) reopens as agreed, the prices of equities, industrial metals and gold could have an upward bias for a few more weeks. If so, it would be reasonable to view this period of relative buoyancy as an opportunity to reduce portfolio risk by building up cash. Doing so would result in an opportunity cost if prices were to continue trending upward, but it would both mitigate the financial consequences of sizable corrections and enhance the ability to take advantage of future price weakness. After all, it’s always easier to buy low if you previously sold higher.

The overarching issue right now is that financial market liquidity is ebbing while high-profile inflation indicators such as the CPI are poised to stand in the way of decisive actions by central banks to bolster liquidity, potentially paving the way for meaningful price weakness within the next few months. We note, in particular, that currently all the world’s most influential central banks are either actively tightening monetary conditions or on hold*, while the gold and crypto markets have been warning for some time about declining liquidity. Also worth noting is that massive IPOs will in effect be shifting demand from the stock market to real assets. For example, the SpaceX IPO transferred US$75B from stock market investors to the company — money the company will now spend on building datacentres, rockets, etc. The same thing happens when instead of spending money on stock buybacks, companies such as Microsoft, Alphabet, Meta Platforms, Oracle and Amazon spend the money on AI-related infrastructure.

Furthermore, it’s likely that the markets have gone a long way towards pricing-in the best-case outcome for the conflict in the Middle East, leaving far more scope for a negative surprise than a positive one.

With regard to industrial commodities, our concern is solely about the short-term, because much higher prices remain likely over the coming 1-2 years. In fact, an implication of the intentions outlined in the US-Iran MOU is that the future demand for many industrial commodities will receive a significant new boost. The boost will come from a privately financed US$300B development fund that will be established to rebuild Iran and that will, if implemented as envisaged, help to integrate Iran into the global economy. This aspect of the deal has been widely criticised, but it is extremely positive. The greater the amount of trade with Iran and the more that foreign companies/investors are involved in Iran’s reconstruction, the lower the probability of another war.

*The Fed is on hold with regard to interest rates, but the new Fed Chair is considering a balance sheet reduction. At the same time, a substantial monetary tightening is underway in China and both the ECB and the BOJ are hiking interest rates.

[This blog post is an excerpt from a recent commentary at https://speculative-investor.com/]

To promote last week’s IPO of SpaceX, some extraordinary forecasts were made. For example, SpaceX founder Elon Musk said that by 2030 the company could be deploying 100 gigawatts of solar-powered artificial-intelligence datacentres into orbit every 12 months. According to the IPO prospectus, this “will require thousands of launches per year and the transport of approximately one million metric tons to orbit annually”. While these prognostications are far from realistic, they do indicate that massive spending on datacentres will continue. Rather than being built at a huge cost in space to take advantage of free energy from the sun, they probably will be built at a small fraction of the cost in Alberta to take advantage of cheap natural-gas-generated power. However, the point is that they will be built. If so, the demand for some commodities will rise substantially over the years ahead, resulting in much higher prices in order to incentivise additional supply.

Of the commodities for which there should be large increases in demand associated with the building of datacentres, up to now we have focussed on REEs, lithium, tin, copper and natural gas. We also are interested in vanadium, which currently is used mainly for hardening steel but probably will be used increasingly for stationary energy storage. For lithium and natural gas there is the potential to ramp-up supply in response to higher prices, limiting the magnitudes and/or durations of bull markets, but that’s not the case for REEs (especially Heavy REEs (HREEs)), tin and copper. Tin, in particular, is at risk of a significant supply disruption due to the Ebola outbreak and political instability in the Democratic Republic of Congo (DRC), the country with the world’s 5th largest production of the metal.

At the moment we are intermediate-term bullish on many commodities, because a broad bull market in commodities is underway and probably will continue for another 1-2 years. However, we suggest being particularly alert to opportunities to purchase the shares of companies involved in the production, or the development of new production, of HREEs, tin and copper. That’s because these are metals that will be integral to the datacentre buildout and for which it will be very difficult or time-consuming to ramp-up supply. Currently, the TSI Stocks List has exposure to HREEs via Aclara Resources (ARA.TO), European Lithium (EUR.AX, EULIF) and Neo Performance Materials (NEO.TO), exposure to copper via Cyprium Metals (CYM.AX), US Gold Corp. (USAU) and Vizsla Copper (VCU.V), and exposure to tin via Metals X (MLX.AX).