Tuesday, August 4, 2009
Commodity prices are an excellent way of keeping tabs in real time on the progress of the global economy. Copper has been leading the way, now up 124% from its lows of last year; crude oil is up 110%; the Journal of Commerce index of commodity prices is up 45%; the CRB spot commodity index (which contains no oil) is up 24%. With few exceptions, just about every commodity on the planet has risen significantly in price from its recent lows. While the almost universal rise in commodity prices might well have something to do with globally accommodative monetary policy, it must also reflect, in my opinion, a revival of global commerce and a resumption of global growth following last year's collapse.
I'm well aware that the global investment community is still heavily populated by bears. Many of the bears are awaiting the second coming of the global collapse, which they assume will be precipitated by the collapse of the Chinese economy and/or the withdrawal of Chinese government stimulus funds. Others point to the dangers of higher T-bond yields, and/or the inevitable reversal of the Fed's quantitative easing strategy. Still others fear that the heavy hand of Obama-fueled government and/or higher tax burdens will crush the private sector. And almost every day it seems, I see an article warning about the coming avalanche of home mortgage defaults and foreclosures, and commercial real estate disasters.
I think the bears underestimate, or fail to understand, the ability of markets to discount the future, and to reprice assets so that they can be redeployed more profitably. We will most likely see higher home foreclosures and increased commercial real estate defaults, but markets are well aware of this and the losses have been effectively priced in. The thing that disturbs markets is the unexpected. By last March the market had come to expect just about the worst combination of events that anyone could imagine. Since then the reality, while still painful to so many, has been much less bad than the expectations. Markets and the economy can rally even when faced with deteriorating conditions in some sectors, provided those conditions have been properly evaluated and factored into prices.
I think the bears also underestimate, or fail to understand, how much and how fast economic actors can adjust to changing circumstances. Free markets are still the rule in the global economy, and there are literally billions of people out there who are eager to work, make money, and improve their lot in life. The Chinese government may well be making some mistakes with its stimulus spending, but it's hard for me to imagine that a few hundred billion of stimulus funds could overwhelm or negate the efforts of the many hundreds of millions of Chinese—and Indian—workers who are driven by an insatiable desire to catch up to the living standards of the West, and who now have an opportunity to participate in the largest global free market ever created.
Posted by Scott Grannis at 10:42 AM