Davis Index: Market Intelligence for the Global Metals and Recycled Materials Markets

The current pressing economic conundrum is how to reduce inflation while avoiding a recession. What a choice. I don’t want inflation or a recession. The Federal Reserve is tightening money and raising interest rates while the economy slows, unemployment rises, and consumer spending goes down. This is a painful cure for inflation.  


Piper Sandler, an investment banking firm, reported that since 1961, the Federal Reserve Bank has embarked nine times on a series of interest rate increases to rein in inflation. Eight times a recession followed. The only true “soft landing” — significant rate hikes with no subsequent slumps — occurred in 1994, when Alan Greenspan was Fed chairman. Oh, there is a third ugly possibility. In the late 1970s we had stagflation, which is the worst of both worlds. It’s a combination of low growth and inflation. 


On the brighter side, COVID-19 cases and deaths have reduced sharply. We are now free to move about the country without masks [at least for a while]. Kansas recovered from the largest first-half deficit in a championship game of 16 points to beat North Carolina.  That proves that miracles can happen.  It is also springtime and parts of the country have just gotten snow! 



Shipments of “core” non-defense capital goods excluding aircraft (a key input for business investment in the calculation of GDP), rose by 0.5pc in February, following a strong print in January as well.  If these shipments are unchanged in March, that would represent a 15.9pc annualized gain in Q1 versus the Q4 average. Industrial production was up 7.1pc in February from a year ago. 


ITR forecasted that Industrial Production and Non-defense Capital Goods New Orders will be strong this year and still positive through 2024. “The financial health of consumers and businesses remains strong” and even with the Ukraine war they don’t see these sectors going into a recession.  


The US Civilian Aircraft Equipment Production 12 month moving average in February came in 19.3pc above the February 2021 level.  ITR forecasts increased production through mid 2023 and then falling in the second half before rebounding in 2024. The ITR Leading Indicator index moved lower in March, marking nine consecutive months of declines but still in positive territory. Housing could have some problems with prices going up substantially and interest rates also rising. Car sales also fell in March to a 12.7 million annual rate on supply chain issues. Ford and GM sales were off about 15pc.    


The ISM Manufacturing Index for March dropped to 57.1 from 58.8 but is still in expansion. March was really a mixed bag as new orders, one of the foremost leading indicators, fell the most since the early days of COVID-19 due to the uncertainty of the Russia-Ukraine war. Supply chain issues are getting better. Inventories are slowly improving as well as manufacturing jobs. These factors lead to the Shapiro Nonferrous Scrap Activity Index for March being up 15pc over January and February and 10pc over the last half of 2021. This index is based on the daily rate for the month from the same accounts. Big gains were seen in the auto, aero, and truck trailer industries. Other manufacturers were basically flat.



Before Russia’s invasion of Ukraine, inflation was getting worse with spikes in food and energy, supply chain issues, and a hot labor market. The war has caused even higher food costs, energy prices and other commodities costs. There are forecasts of inflation going up an additional 1.5pc because of the war. Here are the February numbers. The March numbers will be out in a few days and are not expected to look better. 

  – Consumer Price Index (CPI) for March is up 8.5pc from a year ago, the highest since 1981. It is at a 7.9pc annual rate. 

  – Core prices for CPI, which exclude the normally volatile food and energy sectors, increased to 6.5pc on a 12-month basis up from 6.4pc in February.   

  – Core PCE, Personal Consumption Expenditures is what the Fed uses to measure inflation. It rose 5.4pc in February on a 12-month basis. That marks the sharpest 12-month rise since 1983. It was up 6.4pc including food and energy.  

  – Producer Price Index was up 10pc on a 12-month basis in February and ITR expects it to be high for the rest of the year. The March forecast is for a 1.1pc monthly increase versus February’s 0.8pc increase. 


The recession

There are many opinions on whether or not we will have a recession. I have been reading these opinions and present some of the arguments. As always, going forward there will be lots of VUCA: volatility, uncertainty, complexity, and ambiguity. 


Lawrence Summers is an American economist who served as the 71st United States Secretary of the Treasury, from 1999 to 2001, and as the eighth Director of the National Economic Council, from 2009 to 2010. For over a year, he has been forecasting much of the inflation we are seeing now. 


His reasoning has to do with wage growth: “But in some sense the growth rate of wages is what ultimately determines inflation over time. And wage growth had ratcheted up to a six-plus percent rate by the end of the year. And there were desperate labor shortages, worse than we’ve ever had. And they were forecast to continue.”   


He believes the Fed has been late to the party and continues to underestimate inflation. The Fed just released its median projections: 

 –  Core PCE inflation is expected to fall to 4.1pc at the end of this year, 2.6pc next year, and 2.3pc in 2024. 

 – Unemployment is expected to stay near its 50-year low of 3.5-3.6pc for the entire period. I would like to place a bet on that not happening.


So, what are the arguments for mitigating inflation and the Fed’s ability to slow the economy without a recession? Before the war in Ukraine, “trying to thread the needle” was an appropriate analogy. Since the war, my friend Jim Lipsmire likened it to “threading the needle with a harpoon.” ITR sees inflation at 2.7pc for 2023. Even though the treasury bonds have dramatically increased and there is talk of bonds’ inversion signaling a recession, many others analyzing the bond market don’t see a recession.


Logistics and supply chain have been major causes of our inflation.  Craig Fuller, CEO at Freightwaves, has been way ahead of the curve in forecasting freight trends. In Q2 2020, when freight was cratering along with the economy, he forecasted the rapid reversal of freight costs. He is now forecasting that freight rates are trending down and a recession is looming in this sector. This will result in lower costs, excluding diesel. Along with others, he sees the demand for durable goods falling due to the bullwhip effect, in which companies over-ordered in these uncertain supply chain times and changed their inventory supply strategy from “just in time” to “just in case.” At some point, with a drop in demand or recession, inventories become inflated and new orders are reduced. It’s the old toilet paper effect.


Average hourly earnings were up a seasonally adjusted 0.4pc in March over the previous month, following February’s relatively weak 0.1pc rise, the Labor Department said April 1. In the previous six months, by contrast, monthly wage gains averaged 0.5pc. It looks like more people are reentering the labor market. On the other hand, with unemployment falling to 3.6pc, how much lower can it go without heating up the economy more?


Money supply as measured by M2 was a hot topic during the late 1970’s inflation.  John Greenwood and Steven Hanke, both affiliated with Johns Hopkins University in applied economics, had this to say: “If the rate of monetary growth stays too high, inflation will never come back to Earth, regardless of the Fed’s rate hikes and balance-sheet shrinkage. But if it falls too far, the economy will crash.  What is the adequate rate of growth for the money supply that would eventually hit the Fed’s inflation target of 2pc? It’s the “golden growth” rate of around 6pc. By taking the growth rate in M2 down from its current level of 11pc, Mr. Powell can bring inflation down and land softly.”


The Fed’s slow money tightening and interest rate increases will reduce core inflation, but I don’t see it having much of an effect on food prices. The United Nations reported that worldwide food prices were up 13pc in March, much of it due to the Russia-Ukraine war. This will push many countries into poverty and food shortages. US food prices will keep rising, but not as much as developing nations because we are fairly self-sufficient. I believe many people see higher food and energy prices as “inflation.” That fear and uncertainty could set off more wage price spirals.   


The Russia-Ukraine War – “Why Russian Sanctions Won’t Stop Putin” 

Jane Coaston interviewed former NATO top commander Gen. Philip Breedlove for an article in The New York Times titled “Why Russian Sanctions Won’t Stop Putin.” It is intended to give context and answers to large questions. Breedlove is now the distinguished chair of the Frontier Europe Initiative at the Middle East Institute, and he has a lot to say about the alliance’s approach to Russia. 


“There are people in our government and people in NATO that believe if we keep doing nothing and we just keep doing what we’re doing, supplying them, that the risk will not grow. I’m here to tell you the risk is growing every day,” he said. 


He speaks of the “moral outrage” that the free world countries need to turn into action to stop Putin. Breedlove argues that if we don’t stand up to Putin and his nuclear threats, he will just keep threatening and taking over more countries and territories. There are never easy answers to these horrid situations in which one “human being” and the people who stand behind them can cause so much devastation.   


Russia’s ruble crumbled shortly after sanctions were put in place, and now, six weeks later, it has recovered most of its losses. Forty percent of Russia’s economy is financed with oil, and most of it is still flowing to Germany and Europe at higher prices. Until that stops or slows, Europe is technically financing the war. Russian commodities are being exported to Asia, India, and other countries not committed to stopping Russia. 


The US previously imposed strong sanctions on other countries like Iran, Venezuela, Syria, and North Korea that have not brought about regime changes. The Russian people have given Putin strong support and believe his propaganda, even though they will suffer from this conflict. It looks like the war will continue for some time. 



Xi Jinping and Putin have a lot in common. China will help Russia somewhat, but in the long term, this conflict hurts China more than Russia. China is 18pc of the world’s economy and Russia is only 2pc. China also wants to take over Taiwan at some point in the future. They have the time to wait out the Russian conflict, but it still needs the world’s market to help its economy. Eventually, I hope they try to help stop the bloodshed. 


A famous Chinese blessing/curse is, “You should live in interesting times.” Oh my! That country’s official PMI and Caixin have dropped below 50 and are in contraction. Housing values and construction are off dramatically. GDP is unofficially forecasted to be below 3pc when it is normally 6pc. Their vaccine is about half as effective as ours, and close to 200 million people in cities all over China have been in total lockdown for weeks. This is bad news globally, as it will affect supply chains. Such interesting times. But this too shall pass.  



What makes markets move? In the short term, it is greed and fear; we saw a lot of fear in March. Oil, energy products, metals, and food went crazy with the launch of the war. Oil spiked to $130 a barrel, LME aluminum was above $4,000/mt, nickel was over $100,000/mt on a crazy short squeeze, and copper spiked. They have now settled down to “lower” prices but are still at elevated levels.


In the long term, prices will be determined by supply and demand. As I do my research, I find it interesting to read so many divergent analyses from so many smart people. Will there be a shortage? Where will inventories go? How much demand destruction will occur? Will high prices bring on new production? What about tariffs and logistics issues? A lot of VUCA is at work and that makes these markets move.


A key challenge for global economies is that Russia is a top five exporter of a wide array of industrial inputs: oil and gas [10pc], aluminum [6pc], nickel [2pc], copper [4pc], wheat [25pc], iron, palladium, silicon, and more. Analysts will have to come up with new 2022 forecasts once the effects of the partial supply reductions are factored into the equation.


I focus on aluminum because it is the biggest portion of our business and many of your products; I am a bit obsessed with it. Edward Meir is now forecasting an aluminum deficit of 3.5-4mn mt, up from 1.5-2mn mt. He now sees prices ranging from $3,500-$4,200/mt. 


Gregory Wittbecker, Senior Aluminum Advisor at CRU, also sees a greater aluminum deficit this year. He envisions the LME breaking the 1988 record of $4,270/mt and the Midwest Premium climbing from its current 40¢/lb to 50¢/lb. At the upper end of those numbers, we get aluminum at $2.40/lb. Yikes! On the other hand, Harbor Aluminum Intelligence expects to see a cycle peak before the end of this quarter and “LME prices above $2,600/mt as fundamentally unsustainable.” Round that off for the LME and you have about a 50¢/lb difference; that is not on the high or the low end and does not include the Midwest Premium forecasts. At Shapiro, we sleep better keeping our inventories low and hedged.


All April scrap prices are UP and most are at record HIGHS. I like to keep my Market Insights short and to the point, but not this one. Enough said. 


“All we are saying is give peace a chance.” – John Lennon  

Happy Easter and Happy Passover.

 Life is good. Family and health are precious.   


This report was prepared by Bruce Shapiro and reflects his current opinion of the economy. It is based on sources and data he believes to be accurate and reliable. Opinions and forward-looking statements expressed in this column are subject to change without notice.

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