Tuesday, November 11, 2008

Good news gets ignored

It's apparently not fashionable to talk about the good economic news, but the dollar is up over 20% from its recent all-time low last July. And that's not all: with a stronger dollar have come weaker commodity prices, and that is very good news indeed. Since last July, oil is down 65%; copperis down 58%; non-energy spot commodity prices are down 30%; lumber prices are down 28%; natural gas is down 52%; shipping rates are down 91%; and gasoline prices are down 46%.

What this means is that consumers' purchasing power has received a tremendous boost in the past four months. (A pessimist would say that four months ago consumers' purchasing power was seriously eroded, but it has made a strong comeback since.) The dollar not only buys 20% more of everything overseas, but it now buys almost twice as much of the raw materials necessary to make our economy run. This reflects a major and fundamental shift in the underlying dynamics of the global economy.

Some worry that we are about to enter into a paralyzing period of deflation, but that's not the message I get from sensitive prices. Take gold, for example. It is down 25% from its July highs, but it is still up 180% from its 2001 lows; at $732 it is still saying that inflation is more likely than deflation. Rather than tipping into a deflation, I think prices are telling us that we have pulled back from a debilitating inflation and now face merely a continuation of mild, but above-target inflation. Things could be a lot worse, that's for sure.

Yet the market continues to behave as if all is lost. The pessimism is so thick you can see it.


Manny said...


I love your blog. Found, thanks to Kudlow. Isn't there a good reason fot the "all is lost" market? Couldn't the market be looking out into 2009 and foreseeing a Carter-esque, big-government, high-tax, low-productivity period ahead? As I understand it, markets live in the "future", not the present.

Scott Grannis said...

Thanks Manny, always good to know you are appreciated. I think the explanation for this market is very likely what you suggest. The market is terrified that all is lost, that Obama will do all the wrong things. My hope is that he won't be so stupid as to do that.