Monday, October 26, 2009

Commodities update

I post this update to industrial metals prices because it is one of the key, market-based indicators that I follow, and it has registered a new high today that is 80% above its low of last December. Industrial metals prices are doing very well, and I believe that is a good sign that a) the global economy is recovering nicely, and b) monetary policy in most major countries is quite accommodative and needs to be tightened. I don't know how much of the rise in prices is due to easy money, but if I had to guess I would say about one third, with two-thirds being due to an ongoing strengthening the global economy.

For most of this year, the economic skeptics have argued that higher commodity prices were a misleading indicator of global growth, mainly because they thought that China was mindlessly stockpiling commodities in an attempt to reduce its dollar exposure. I argued instead that this was an unreasonable assumption, because virtually all commodities were rising, global confidence was rising, monetary velocity was rising, swap spreads were moving back to normal, credit spreads were declining, and stock markets were rising. In short, I saw numerous indicators of recovery that all agreed with each other. The "China stockpiling" theory did a poor job of explaining how all these things could be happening.

Rising commodity prices were among the many "green shoots" that signaled recovery long before the market was prepared to believe in one. They continue to reflect a fundamental improvement in the economy, and they are sending a strong message to the world's central banks, especially the Fed, that a tightening of monetary policy is long overdue. The sooner the Fed gets the message, the better for everyone.

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