Wednesday, April 7, 2010
The ongoing boom in commodity prices is just too big to ignore, especially when virtually all commodity prices are rising, and rising strongly, as this chart shows. This is big news, and it doesn't get enough attention.
Commodity markets are at the real-time intersection of global supply and demand, which in turn are influenced by the decisions of billions of consumers, millions of producers, millions of manufacturers, millions of speculators, and millions of hedgers. And their decisions, in turn, are influenced by the monetary policies of the world's central banks, the fiscal policies of the world's governments, and the behavior of the world's currencies.
Commodity markets are beyond the control of governments and bureaucrats. Commodity prices aren't subject to measuring delays, seasonal adjustments, or revisions. Nobody can corner the global market for commodity prices.
Commodity prices are the closest you can get to the vital pulse of the global economy. And the pulse is strong, very strong.
What exactly are the commodity markets telling us? For one, demand for commodities is outstripping supply. Global demand has bounced back strongly after almost shutting down in late 2008. That shutdown led to unwanted inventory accumulation among commodity producers, who then took steps to cut back on production, shutter mines, and cap wells. Now the producers are scrambling to get back on line, and having trouble keeping up.
Two, it's likely the strength in demand is being augmented to some extent (how much is anyone's guess) by easy money. Every one of the worlds' central banks is pursuing an accommodative monetary policy. (Some, notably the Reserve Bank of Australia, are worried that interest rates may be too low, but no central bank has yet adopted a policy calling for monetary restraint.) Easy money has a way of causing unease among the investing public which can manifest itself in an increased demand for tangible assets (real estate, buildings, and commodities, which are the building blocks of all the world's things) and a reduced demand for money.
This chart should be prominently displayed at every meeting of every board of governors of every central bank. Its message is clear: the time for easy money is past; it's past time to start raising interest rates. The global economy is unquestionably growing, and there's a danger that demand could be driven to excess by too much money. At the very least, there is not a scintilla of evidence in this chart of the economic fragility that would be the only justification for an extended period of exceptionally low interest rates.
And to reinforce this message, I would add this chart of the price of gold. I would love to hear a central banker try to dismiss the inflation implications of this chart for monetary policy.
Posted by Scott Grannis at 9:29 AM