Wednesday, January 21, 2009
I first noted this in early January, and it's still the case: commodity prices in general appear to have bounced in the past few months. The big selloff in commodities happened over the course of the fourth quarter, and it certainly looks like this had a lot to do with the unwinding of carry trades, the unwinding of speculative commodity positions, and the deleveraging and drawdowns of hedge funds.
Interestingly, though, the pattern applies even to commodities that are not traded on futures exchanges. That tells me that two things were going on in the fourth quarter: 1) liquidation of speculative long positions, and 2) a major slowdown in global demand for commodities. Now we're on the other side of that trade. Leverage is starting to look much more attractive on the margin, now that large institutions can borrow at 1% or less, thanks to easy money from the Fed. Plus, commodity prices are down hugely from earlier highs. But perhaps most importantly, higher prices for raw industrial prices suggest that global demand is once again picking up.
I note also that a large number of commodities, including the energy complex, appear to have hit bottom at levels that were last seen in 2004. That was the year when the global economy started roaring ahead. U.S. exports surged 13% that year, thanks to strong global demand. Commodity prices rallied strongly in late 2003 and 2004 as demand for just about everything picked up. That prices have only fallen back to levels last seen when the global economy was robust is another indicator that fears of deflation are overblown, and it also suggests that we have seen the worst of the economic news.
Posted by Scott Grannis at 10:54 AM