Monday, April 19, 2010
The amazing action in the commodities markets continues. This measure of raw industrial commodity prices is only 2.6% below its all-time high, and looks set to break new ground soon. The commodities that make up this index are not the sort of commodities that lend themselves to massive speculative activity, so I think the price action here mostly reflects strong global demand. Demand can be influenced by monetary policy, of course, because easy money tends to boost people's desire to own tangible things, and these commodities are the raw materials for a lot of "tangible thing" production. Easy money + strong global growth = strongly rising commodity prices.
The message to investors: the action in the commodity markets is a strong sign that deflation risk is minimal, if nonexistent. Yet the Fed and many market participants continue to fear deflation: that is one reason why the Fed has kept interest rates at zero for a year and a half, and it helps explain why Treasury yields are still extremely low from an historical perspective. I think the market is over-estimating the potential for downside risk, and that means there is still plenty of upside in equities. Full disclosure: I am long equities, TIPS, corporate debt, and emerging market debt at the time of this writing.
Posted by Scott Grannis at 9:52 AM