Morning notes

Gold, silver, copper all flat. Lumber futures (LB) are having a terrific run up. I think this is definitely an inflation signal. Faint stirrings of a yield curve steepening in Treasuries (I live in hope!). The downtrend in China equities looking increasingly established. I’ve been bearish about the Hang Seng for a considerable time, but it’s been very strong this year, for reasons beyond me (endless pumping of new hope for “Phase 1” trade deal?). US equities insanely resilient. Two consecutive down days for the Nasdaq was remarkable enough to produce a headline the other day. What other index has ever been like it? Some negativity about EU banks in the FT, although it’s hard to see any banks doing well in this situation. Dollar is fairly flat, but gently declining against currencies of countries which have a chance of maintaining a balance of payments surplus. I fancy Canadian dollars, personally, but the Aussie dollar is doing fairly well. I prefer Canada because I don’t like the China exposure implicit in Australian assets.

This article says that 57% of “slum dwellers” in Mumbai have antibodies to Covid-19. It seems hard to believe that in the long run the whole global population will not end up having been exposed. The article has a fairly negative tone, but to me it’s encouraging. There are reasons to fear the “fat tail” risk in pandemics, and it is conceivable that a disease emerges which is slow acting, very lethal, and fantastically infections (a sort of combination of HIV before anti-retrovirals and measles). The steps required to stop such a pathogen will be unimaginably damaging to the economy. I still suspect that we might decide not to do much about it collectively, but that is a political decision (unfortunately).

Lumber

This is a long-term chart of lumber prices. It’s very volatile. It might be easier to interpret if it were deflated by CPI. I can see why the expectation is that it will come down, but maybe not until it’s gone a lot higher. What is clear is that recessions make lumber cheaper: hardly a blinding revelation. I assume that a forest owner who foresees a steep increase in the price of lumber in the future just leaves his trees in the ground. If they all do this, the price will react, à la rational expectations theory, and the price will spike today. We will see.

source: tradingeconomics.com

Coal

When I was a kid, we had an open fire, the fuel for which was offcuts of wood, and coal: this is not an experience shared by many children in the west these days. Coal is becoming increasingly irrelevant as a fuel. An exception might be metallurgical coal, which is specifically for blast furnaces and may have had its price depressed ‘unfairly.’ $HCC has a lot of the stuff, but given that operating blast furnaces will increasingly be found only in China, it looks a risky thing to bet on. It’s a pity, because $HCC has ‘deep value’.

Afternoon wrap

The day is mildly risk on still. DX is down, about 0.3%, $ES_F is up about 0.8%, VIX is down a bit, there is a faint trace of yield curve steeping. Gold and silver are becalmed, miners down. Tankers are up a bit, without much movement in crude ($CL futures up 0.4%). Nat. gas (future) is up over 3%. Euro area banks are down 1%. The worst is yet to come, probably when all the head traders are on vacation in the Hamptons.