Tuesday, October 20, 2009

Copper update



This chart of copper prices looks like a lot of commodity price charts these days: prices are up significantly from last year's lows. I have been encouraged to see rising commodity prices all year long, because I think they mean that a) monetary policy has been accommodative, thus removing the threat of deflation which had weighed down equity markets late last year and earlier this year, and b) global economic activity is picking up, thus removing the threat of depression or deep recession that had weighed down all markets. In short, since early this year commodity prices have been telling us that the "sum of the market's fears" (i.e., depression and deflation) were completely misplaced. Thus it made sense to be bullish.

Meanwhile, the dollar has been declining against most other currencies since March, and is closing in on its all-time lows. It's not the end of the world, though, since we've been here before (the dollar was about 5% lower than it is today throughout last year's second quarter). But it's high time that the Fed took notice of both the dollar and commodity prices and started to reverse its quantitative easing before it's too late. Money is plentiful and inflation pressures are building. The stock market is confirming that the prospects for the future have brightened considerably. There is no longer a need for super-accommodative monetary policy.

10 comments:

Daniel said...

Commidity prices up, Dollar down (import prices up) yet Wholesale prices fall 0.6%. The fed will clearly take this as breathing room.

Thomas B said...

Scott ... a few questions.

What role does the "flight to safety" and hoarding of dollars play in this? How are dollars available vs. stashed measured?

Isn't there also a "beggar thy neighbor" scenario at play? The European finance ministers flagged the weak dollar as problem at a meeting yesterday in Luxembourg. Sure is a problem for export driven Europe (Germany in particular) if the euro goes up, and doubly so because of the relationship between the yuan and the dollar.

Would appreciate your views on these issues.

Tom

Chris said...

Looks like a combination of a declining dollar and foreign countries diversifying out of dollars into hard assets.

Maybe Paul Farrell is right; could American capitalism be on the verge of collapse?

http://www.marketwatch.com/story/americas-soul-is-lost-and-collapse-is-inevitable-2009-10-20?pagenumber=1

Beavis said...

Hahaha. No deflation? Wanna bet? There is no demand for capital in the American economy. So, we get another bubble. Deflation dead ahead. It's the same idiotic mess created by the same Wall Street idiots.

Public Library said...

Dollar continuing it's decline, oil above $80, and gold at $1060, the clouds are forming...

Scott Grannis said...

Daniel: the Fed seems to be taking everything as breathing room these days, unfortunately.

Scott Grannis said...

Thomas: The rise in commodity prices has occurred as dollars have been "de-hoarded." People are unloading dollars and loading up on the things that benefit from a cheaper dollar, such as commodities and gold. There is now an excess of dollars being supplied by the Fed and these dollars are in effect finding their way into tangible assets of all sorts.

The concern over dollar weakness is legitimate, but not because of the effect on trade flows. Devaluing a currency with the intent of boosting exports is a fool's game. The problem with currencies is that they keep fluctuating all over the place. We need monetary policy to focus more on currency stability and less on boosting growth. Monetary policy was never intended to be a tool for managing growth. That is also a fool's game.

Scott Grannis said...

Chris: much as I worry about things, I just don't think we are anywhere near a collapse.

Thomas B said...

Scott ... any comments on the tax on foreign security purchases in Brazil? Still bullish on the real?

Scott Grannis said...

Thomas: I'm disappointed in Brazil for putting a tax on capital inflows. This tempers my enthusiasm for the country, and it looks like the market feels the same way. But a 1.5% tax is not going to be the end of the world—it will just slow down Brazil's recovery.