Thursday, November 11, 2010
Crude oil is now trading at a post-recession high of $88/bbl (first chart). Many non-energy industrial commodities (second chart) are now trading at all-time-high prices. With few exceptions, almost all commodity prices are rising: soybean prices, for example, have jumped 50% since last June. This is not the stuff of double-dip recessions, nor is there even a hint of deflation in these facts. The only legitimate question is whether the rise in commodity prices is being driven by accommodative monetary policy (i.e., too much money) or strong growth in global demand (i.e., the forces of recovery), or by some combination of the two.
I've been arguing for awhile—since early last year—that rising commodities are an excellent portent of recovery. We've seen lots of confirmation of recovery since then: strong growth in corporate profits, rising equity prices, rising federal revenues, rising auto sales, rising incomes, rising jobs, rebounding global trade, and declining swap and credit spreads, to name just a few.
I've also argued repeatedly that higher commodity prices are symptomatic of accommodative/inflationary monetary policy.
This next chart shows that the dollar has been highly inversely correlated with commodity prices since mid-2001 (-0.85). Not coincidentally, 2001 was the year in which the Fed started to ease after tightening so much in the late 1990s that the dollar soared and commodities collapsed in the early 2000s. Gold began rising in early 2001, at about the time the Fed first started easing, and commodities started rising by late 2001. The Fed kept interest rates exceptionally low from mid-2002 through mid-2004, during which time the dollar fell sharply and commodities rebounded strongly. I think this all makes the point that the Fed's monetary policy stance has played a strong role in the evolution of commodity prices for many years now, and that therefore the latest rise in commodity prices is due at least in part to easy money and thus a portent of rising inflation.
The rise in commodity prices which began early last year has not been nearly as well correlated to the dollar (-0.36) as it was in the mid-2001 to late 2008 era (-0.87), which in turn suggests that there have been other factors at work since early last year that have been more dominant, namely the forces of recovery.
Posted by Scott Grannis at 1:58 PM