Chile - The Perfect Proxy For Globalization. Good Times To Return? You Be The Judge.

My first foray into the futures market happened when I was right out of college and involved copper. More specifically Codelco, the massive Chilean copper producer. Codelco workers were striking and it was my opportunity to become a millionaire due to supply disruptions. Instead I got my head handed to me. An introduction to the art of the game. And, to the reality that what we call investing can easily be confused with gambling. I've seen a few top traders remark that they can't go on vacation unless they are close to a casino. It's quite obvious that many attracted to the game are in it for the thrill.

By the way, do you know what personality profile makes the best trader? High-functioning sociopaths. Very true. Complete detachment from emotion and the normal operation of our inherent ability to process and even withdraw from danger and risk. Ability. Yes, ability - it's a mental competence. Competence reinforced through processing two hundred thousands years of risk. Might be something to think about when one considers Wall Street's demise and their seemingly shameless behavior. Wall Street is a natural magnet for personality disorders as are casinos and other forms of gambling. So is the corporate ladder or any other position of power. Saddam Hussein? Kim Jong-il? Adolph Hitler? Joseph Stalin? Pol Pot? So people are supposed to trust leadership because they were smart enough to make it to a position of power? No, intelligence is not a motivation for power. Intelligence is a motivator for knowledge or enlightenment. Ego and control are motivations for power. Most people have generally healthy egos but it is not our enlightened self that seeks power. This is part of the human condition we all suffer from. Our yin and yang.

Have you ever looked at the profile for a sociopath and compared it to the mess we are in with corporate governance and the implosion of Wall Street? How else does one so elegantly explain Wall Street's behavior? Seriously? And we would let government overturn regulation of our money were even a small percentage of Wall Street traders and executives to fit this profile? Could you imagine testimony before Congress arguing regulation because our leaders have a higher probability of being crazy? Yet, that is exactly why we have so many checks and balances in our government. Because whether they overtly acknowledged it or not, our founding fathers realized those seeking power and dominion over others are never, ever to be trusted. There are very few enlightened absolutists. It's an interesting perspective not discussed in the mainstream media.

Back to Chile. Some months ago Codelco experienced significant labor unrest and strikes. But as copper output decreased prices were weakening as opposed to what they are "supposed" to do. The game has worked until it no longer worked.

Chile mines approximately 35% of the global copper. With copper prices at levels never even remotely approached from a historical perspective, the Chilean government has been anxious to get its grubby little fingers on as much of that money as possible. To understand this, one must realize Codelco is nationalized. During the boom years of this cycle the Chilean government commissioned a study to look into the rise in copper prices. That study came to a conclusion that some percentage of the rise in copper was sustainable and permanent. I remember reading that and thinking only two bureaucracies could ever commission such a study with such blatantly fallacious conclusions. One is Wall Street and the other is the state. Now, why would the Chilean government undertake this effort? Why, of course, to be able to enhance the power of the state. And, how do they do that? By spending more of Codelco's profits. Five years ago the Chilean government spent 10% of Codelco's profits and today they spend 50%. You read that right. And, Codelco's revenue is about ten percent of Chile's GDP.

Secondary and tertiary employment and economic impact ties Chile's prosperity substantially to the price or demand for copper. What happens to the Chilean economy when prices return to their fifty year average or revert to the mean? Remember, it costs about 7 cents a pound to pull this stuff out of the ground. $4 a pound for copper at its peak? You must be kidding. At the height of this irrationality, I remember reading a report that said we were at peak commodities not just peak oil. And, of course, I am Buddha. Both are convenient lies.

For those who hold out hope that the global economy will re-ignite, the best metric on earth to determine the state of globalization is the Chilean economy. The Chilean stock market and the price of copper are both shown on the chart above. Copper pricing is in black and Chilean stocks in red. Storm clouds are clearly ahead.