Commodities update

This chart shows the average price of "raw industrial" commodities, and it doesn't include most of the commodities that you might associate with speculative activities. As of yesterday, the index was only 10% below its all-time high which was set in May '08. This represents a pretty dramatic recovery for commodity prices, especially considering the fact that the U.S. economy, which represents about 20% of global GDP (according to the World Bank) and is roughly twice as large as its nearest competitor (China), is operating with significant excess capacity and is substantially below its full-employment output level.

The strength of commodity prices also stands out when you consider that a) the market cap of the global stock market is 26% below its high of late 2008, b) crude oil prices are about half what they were in mid-2008, and c) the dollar relative to other major currencies is stronger today than it was in mid-2008 and about the same as it was in late 2008.

My point with this is that commodity prices are telling us that something quite significant is going on under the surface of the US and global economies. Strong price action likely reflects both a strong revival in demand as well as the impact of monetary policy which is almost universally accommodative. Whatever the case, commodities are emphatically signaling that the world is in much better shape (both from a demand perspective, and from the standpoint of deflation risk) than markets seem willing to believe.

Commodity price action was one of the early indicators of economic recovery, and the message of commodities has only gotten stronger.