Tuesday, February 24, 2009

Good news recap

(Note: This post marks the start of a series in which I plan to recap all the things that I think paint a positive picture of the economy, in order to provide some balance for the depressing stuff you encounter in newspapers and television. With the equity market having fallen by 50% from its recent highs, and credit spreads still incredibly high, the market is essentially forecasting that economic conditions will soon prove to be catastrophically bad, on the order of magnitude of the Great Depression or worse. I've outlined this reasoning in greater detail in this post from last November. So the news doesn't necessarily have to be positive to be significant, it just has to be better than distressingly awful.)

After plunging 60% from July through November, industrial metals prices have been relatively stable for the past 3 months. This same pattern is repeated for the great majority of commodities as well. That prices are no longer falling is an excellent sign that neither the U.S. nor the global economy is going down a black hole. Indeed, activity appears to be stabilizing. Plus, even though the commodity markets have collapsed, prices are still significantly higher today than they were at the tail end of the 2001 recession. The pessimists argue that we are in the grips of a global deflation driven by weak and declining demand, but I would argue that where commodities are concerned, we've simply seen the popping of another bubble, one that was driven by cheap money and a desire by many institutional investors to add commodity exposure to their portfolios. Things are now back to more reasonable levels, and that can be conducive to growth going forward.

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