Thursday, April 9, 2009

Dr. Copper says the fever has broken

Most commodity prices have bounced since the lows of late last year, but copper is now up 65% from its lows! Some of this may be profit taking by the shorts, but I have to believe copper is sending a very strong message regardless. That message is what best explains the equity market rally over the past month, and it's multifaceted. The economy is not going down a black hole; expansive monetary policy is gaining traction; demand is recovering; we are not in the grips of a deflationary depression; this is not the end of the world as we know it.

The economy still faces huge obstacles to a full recovery, no doubt about it. Fiscal policy is more likely to smother growth than to stimulate it; there are still many homes that will be foreclosed; the labor market has yet to find its footing (but I note that unemployment claims have been flat for the past weeks), etc. But the market was priced for a long downward spiral. If it can just manage to avoid going down a black hole, that becomes very bullish given the market's pervasive pessimism. This rally is a sign that the economic fever has broken; the patient may take a long time to fully recover, but he is not going to die. That's excellent news.

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