Monday, March 30, 2009
I keep coming back to this theme: the global economy is not going down a black hole, and there is no generalized price deflation. This chart of industrial metals prices shows that prices hit a low in late November last year, right around the time that equity markets hit their first panicked lows. Prices have since stabilized and in many cases are rising. This record of market-driven, real-time prices does not fit the current popular narrative which holds that the global economy is in the grips of a ferocious, deflation/depression. Many commodity prices today are around the same levels as we saw when the global economy first began to pick up in 2004, and they are way above the lows of 2001, when deflationary monetary policy was a real problem.
This chart is consistent with my suspicion that the worst of the economic news is clearly behind us, and I think it is consistent with my late December forecast that the U.S. economy would hit bottom before mid-year. Inflationary monetary policy created a lot of bubbles in the prices of tangible assets (e.g., real estate, oil, commodities), but those bubbles had largely popped by the end of last year. Sure, there are still ongoing adjustments in many housing markets, but the bulk of the price adjustments in the most over-inflated markets has already occurred. The physical economy is therefore in the advanced stages of correcting the excesses of the past several years. It's my belief that we would have had a nice recovery in equity markets by now if it hadn't been for the shocking fiscal profligacy of the Obama administration. Markets around the world were deeply shaken by the prospect of massive increases in the size of government and its attendant rise in tax burdens, both of which represent a significant drag on economic productivity and a significant reduction in the after-tax return on capital.
I am heartened therefore to see that many European politicians are rejecting calls for increased spending. I am very encouraged by the Tea Parties taking place around the U.S. I think the increasing push-back that Obama is feeling is good news for markets. Valuations are still terribly depressed, since at these levels they are consistent with deflation/depression. Market-driven prices, meantime, are telling us that deflation and depression are not in the cards. Fiscal overreach can and most likely will slow the pace of recovery, but it can't kill the chronically dynamic U.S. economy.
Posted by Scott Grannis at 6:11 AM