Monday, September 14, 2009

Commodity prices up 30%

Spot prices on a range of basic industrial materials are up about 30% from their lows of last December, having now recovered a little more than half of what they lost last year. I like the parallels between the commodity price recovery and the market cap recovery highlighted in my previous post. There is a strong connection here, since the collapse in both price series was the result of a financial market panic which caused a sudden and dramatic reduction in global commerce.

At the depths of the panic late last year, markets feared the onset of a global depression and deflation unlike anything seen in modern times. Fortunately that possibility now appears extremely remote, mainly because central bankers successfully matched the world's demand for liquidity and safety. There is plenty of damage left to be repaired, but as both these charts show, there is plenty of room on the upside for those willing to take the risk that the global economy can continue to right itself.

I'm mindful of the potential threat of all the liquidity that has been pumped into the system, but for now it appears to have done the job. The unwinding of the liquidity injections will be the big story in the months to come.


seekingtraceevidence said...

How much of the move in commodities is due to the carry trade? I see substantial carry trade in Treasuries so even with the new issue rates are falling.

Scott Grannis said...

I think it's impossible to answer that question. I've been saying that there are two principal factors driving commodities higher: 1) a revival of global commerce, and 2) accommodative monetary policy. One can only venture a guess as to how important each of these is. I'll throw caution to the wind and say growth is about two-thirds and monetary policy (aka the carry trade) about one-third, but that is pure speculation on my part.

seekingtraceevidence said...

Thank you. That is helpful.