Tuesday, February 9, 2010
Early in January I posted a chart of copper prices with the title "Dr. Copper says the patient has recovered." I noted that the huge rebound in copper prices was a good sign that the global economy had recovered from its slump and was rapidly returning to health. Since then, copper prices have fallen about 15%, commodity prices in general have slumped, and so have equity prices.
The shorthand version for what has happened in the past month is a reversal of the "carry trade:" risk assets are down, and the dollar is up. Fear is up too, with the VIX bouncing from the teens to the mid-20s. Concerns over Greece and the stability of the EU are likely catalysts for the recent bout of nerves, but so too is the sudden rise of populist attacks on big banks (see my friend Don Luskin's article in today's WSJ on the subject), concerns that Fed and some other central banks are preparing to tighten monetary policy, and the fact that numerous countries, including the U.S., are being forced to confront the problem of out-of-control budget deficits brought on by profligate public sector spending practices.
Does this selloff in risk assets mark the end of the recovery and the beginning of a renewed bout of economic weakness? Could a Greek default really bring down the EU and/or the Euro, and ultimately infect the U.S. economy with another case of the economic willies? Is the global recovery so tenuous that it can't bear interest rates that move up from zero, or that it can't survive without government spending life support?
My position for the past year or so has been that the U.S. economy has recovered in spite of all the fiscal and monetary stimulus that has been thrown at it; that in fact the recovery would be stronger if it weren't for stimulus. I think fiscal and monetary stimulus are vastly over-rated. No one can prove what the government spending multiplier is, but I'll vote for it being negative. I don't see how the act of taking money from John and giving it to Joe can result in a stronger economy, and if Joe ends up being less careful about spending the money he's been given than John (which is not a very dubious proposition), then the result is clearly a weaker economy. And since when does printing money make an economy stronger? Throwing money out of helicopters probably results in new spending, but that is much more likely to just push prices up than it is to cause anyone to build new plant and equipment.
Consequently, I can't get concerned over the approach of the end of stimulus, which I think is the dominant source of the market's fear in recent weeks. Bring it on, I say. Let's have higher interest rates right now, so we can worry less about what how high inflation might go in the future. Let's have spending freezes or outright reductions in spending right now, so we can worry less about how high future tax burdens might have to rise. Let's please return to the old-fashioned notion that people know best and government knows least about how to run our lives and our businesses. Let's hope that the Tea Party ends up throwing a bunch of misguided politicians of both parties out of Congress come this November.
If lower copper prices and a reversal of the carry trade are signaling anything, it's that the world may be stumbling its way to a better set of policies, and that is good news.
Posted by Scott Grannis at 12:07 PM