Thursday, March 19, 2009

Copper update

Copper prices are up over 40% from their December lows. You see this pattern in a lot of commodities (crude oil is up about 50%), even though broad commodity indices are relatively flat. The main message I see is that the big commodity price deflation of late last year is history. Demand is coming back, monetary policy is reflationary, and forced liquidation of carry trades appears to be a thing of the past. The global economy is not going down a black hole. Optimism is warranted.


PD Dennison said...


A question on where we are going with the economy. I agree with you that we are not heading for the Great Depression (deflation, massive decline in the economy), but I do fear we are heading down the path of Japan in the mid-80's.

Japan saw little growth for 25 years despite big government spending. Japan was (is) an over leveraged, tapped economy that has been unable to get out of its own way for 25 years.

Does the Japanese experience mirror the US/Europe situation today? What are the differences?

PS: I am looking forward to hearing more about your trip to S. America.

Mati Vivaldi said...

With copper prices stabilizing and free-market Sebastian Pinera with high chances of being elected as President of Chile at the end of this year it is time to turn REALLY BULLISH in the Chilean economy.

Scott Grannis said...

There is a pretty strong negative correlation between copper prices and the Chilean peso, which lends strength to your argument. It also helps that the government has recently decided to spend some of the $billions that is has socked away in its rainy day fund (from copper revenues).

If deflation is over and monetary policy actually gains traction and becomes inflationary, this should benefit all emerging market economies.

Scott Grannis said...

PD: On the subject of whether the Japanese experience with deflation has relevance for our current situation, I really don't think so. Japan's deflation was the result of massively deflationary monetary policy which was reflected in a gigantic appreciation of the yen. Our dollar has not exactly done the same, and is actually pretty weak. The Japanese banks were not allowed to clean up their balance sheets, so prices (e.g., housing prices) took many many years to adjust; we've seen some pretty dramatic price adjustments so far.

Japanese government spending was largely useless, however, and Obama's "stimulus" plan won't help our economy either, so that is a potential parallel. I can only hope that our political establishment mounts some opposition to continued efforts to "stimulate" by spending money in a highly wasteful fashion. I see that Blue Dog Democrats are organizing to do just that, which is quite bullish.