Wednesday, May 27, 2009

Green shoots turn red-hot


I've been referencing the upturn in the Baltic shipping indices since early February, arguing that they were a good sign that the global economy was coming back to life. As these charts demonstrate, the rebound in the cost of shipping raw materials has now skyrocketed—the Baltic Dry Index is now up 377% from its December low. If this isn't a V-shaped recovery in global trade, I don't know what else to call it. Skeptics will say this only represents Chinese stockpiling of commodities, and that may indeed be a significant factor. But something is definitely going on out there. Where there's smoke there's fire.

I really doubt that the Chinese are the only ones doing something with all the money that is floating around the world. I note that virtually all industrial commodity prices are up significantly so far this year, and oil prices are up 80%. U.S. consumers are paying 50% more for their gasoline since the end of last year, according to AAA.

With the banking system now literally awash with liquidity (the U.S. monetary base, which is the part of the money supply that the Fed controls directly, has more than doubled—rising by almost $1 trillion—since last September), and with interest rates on cash less than 1%, it is only natural for people to try to shift some of that money into hard assets, thus pushing up their prices. And I think that helps explain why the equity market has been doing so well in the past few months. Furthermore, we've seen increasing signs that consumers are spending some of the money they hoarded in the final months of 2008; monetary velocity has turned up, and that means that the economy has likely turned up as well.

11 comments:

Donny Baseball said...

Scott-
The BDI is directly related to the industrialization of emerging markets, namely China and India. The container (box ship) market, which is more OECD oriented, is still flat on its back and nobody expects it to pick up any time soon. The critical difference is the way that emerging markets are doing things versus the way the developed world is doing things. China's stimulus is $400 billion of unadulterated Keynesian infrastructure spending. Indian voters just gave its pro-trade, pro-reform, pro-growth government a resounding victory over the socialists. The OECD misfired with social spending dressed up as stimulus, and the engine of the developed world, the US, has the most anti-capitalist executive in a generation, enabled by an incredibly anti-business Congress. Emerging markets can't afford stagnation, so they are getting back down to business, while we in the developed world seem to feel we can flirt with stagnation (our President seems to actually want it). We are on the cusp of cap and trade, while Brazil is plowing ahead with a $175 billion investment in their oil deposits. The EMs are desperate to steal some business from us while we have an multi-year episode of anti-business policy. Ireland and Switzerland will win alot of corporate relocations during this period and Asia and Latin America will win alot of production projects and investment from US multi-nationals over the next few years. It will set is back several years and catapult them as they get new physical capital and technology/know-how transfer out of the deal.

Paul W said...

How are you calculating velocity? From which data sources?

ronrasch said...

With interest rates rising how can the US afford to finance its massive deficits? As Donny Baseball points out the administration's actions will limit US productivity and its spending will push up interest rates.
yikes

Tom Burger said...

If this incipient recovery is in fact due to "all the money" sloshing around the world, then we don't have a healthy recovery. What happens when the Chinese try to trim their infrastructure "stimulus"? What happens when the US stops running a $2 trillion deficit?

We can play "ride the bubble" in stock and commodity prices, and good traders may make some money -- but we can't be logically happy with yet more Fed induced bubble activity masquerading as economic growth.

The insanity of it all has escalated to almost impossible levels this time around -- what's going to happen when the next down turn comes?

Micael said...

I am very new to bond investing but I was very lucky 10 years ago when the price of gold was below $300.00 and I went long calls and did well in long coffee as well.

That was a long time ago. My point is does the rapid rise in treasury yiedls portend something more serious?

I am not a gold bug, I in fact believe gold is way overbought and is headed much lower. But I am 63 and have money to buy the right kind of bond fund. Can you help me?

Public Library said...

I agree with Mr Burger. The Fed is trying to induce another bubble to avert the collapse that is necessary to purge the system of bad assets and the misallocation of capital. They admittedly took the path they believed at the time was the lesser of two evils. The problem may be that the results under both scenarios were equal thus the appropriate medicine would have been to do as little damage as possible. Instead they have levered up and bailed out the system, in the short run that is. It is only a matter of time before this little masquerade party ends ugly. The Baltic will continue heading Northward along with other commodity prices while the US growth rate stagnates and inflation takes hold.

10% inflation for 10 years will get our debt as a % of GDP back down to normal levels. The only problem is that inflation does not usually follow a smooth path…

Scott Grannis said...

donny: Outbound container shipments from Long Beach and Los Angeles have picked up dramatically this year--see my posts and charts on the subject. Let's say you're right and BDI is surging only because of China and India; that still argues for a global recovery. Those countries can't grow without buying more from the rest of the world, and it will be almost impossible to stop them from growing. And emerging markets are desperate to grow as you note. I agree US growth won't be huge, but given the depressed valuations out there, even tepid global growth is bullish for the markets. So, things could of course be an awful lot better, but it pays to be optimistic since the markets have been betting on things being an awful lot worse.

Scott Grannis said...

Paul: I figure velocity has turned up since M2 money growth has slowed at the same time consumer spending has picked up.

Scott Grannis said...

ronrasch: Interest rates are going to have to get an awful lot higher before the US has trouble financing its deficit. In the meantime, rising rates are going to make it tougher for politicians to ignore the deficit, and thus the bond market vigilantes may come to the rescue on behalf of the rest of us.

Scott Grannis said...

Tom and Micael: Until very recently, the Fed's massive balance sheet growth was not inflationary, it was done to accommodate an equally large increase in money demand. That's what a central bank is supposed to do in a crisis. I'm now arguing that we've passed through a tipping point, and so going forward the Fed is going to be increasingly oversupplying money to the system unless it takes action to withdraw liquidity from the system.

We may well end up with another inflationary bubble--I'm not going to disagree with you on that point. But we are only in the very early stages.

Meanwhile, I continue to think it's bullish that a) deflation risk has vanished, b) there is no shortage of money, c) risk appetites are increasing, d) the economy is slowly improving. Considering how fearful the market was of a global meltdown, the current reality is infinitely preferable, even if it is flawed.

Donny Baseball said...

Scott-
Don't get me wrong, I am optimistic and bullish, just that my bullishness is maybe 80% globally driven and 20% US-driven. I expect only modest recovery in the US - the heart attack victim will get up off the floor, but he won't be doing any jumping jacks. And, like you, I am short US monetary policy (I own TBT).

Yes, Long Beach is showing some signs of life (that post was indicative of the great value of this blog), but we need a massive upswing in OECD trade volumes to see box ship recovery. BDI health and container weakness is a proxy for EM recovery and DM stagnation.