Copper Rules Everything Around Me: C.R.E.A.M.; Or A New Rule | Exploring Markets

Copper Rules Everything Around Me: C.R.E.A.M.; Or A New Rule

There is an old adage on Wall Street, "Bull markets have a copper roof."

Copper has been known to be one of the strongest barometers of economic activity since the great industrial revolution began.

Copper is used for pipes, wires, buildings, cell phones, computers, cars, plumbing, and just about any solid device constructed by man meant to last or conduct energy for an extended period of time.

So it makes sense that a trader or economist would suspect an improving economy to correlate with a rising price of copper. A higher copper price means higher demand which in turn must imply that economic activity is robust.

Copper Rules Everything Around Me. (Hat tip to Petr on StockTwits who coined this term)

However, it is our belief that this relationship is breaking down.

We believe it is breaking down because of a structural shift in economic activity and improvements in efficiency. That at the cornerstone of economic activity is not so much the mass production of buildings, bridges, and cities as it once was but instead on the development and production of small consumer goods and Internet based services. And also that the durability and technology of these goods and services has advanced and they now last longer than ever.

Just think about how much longer a water heater lasts today vs ten years ago, or how water pipes are now predominately CVC rather than steel or copper. There is a structural shift at hand, and copper has become less meaningful.

Notice the most recent divergence between copper and the S&P 500:

Copper Settlement price and the S&P 500 YoY Change

Now, notice the most recent divergence between copper and GDP:

Copper Settlement Price and GDP YoY Change

A new economic Barometer to watch is the use of chemicals.

As technology has increased, chemicals now are being used for pipes, plastics, glass, consumer goods, recyclables, and even clothing. Examine these two charts:
Chemical Utilization and S&P 500

Chemical Utilization and US GDP