Wednesday, May 27, 2009
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.
Posted by Scott Grannis at 3:29 PM