Tuesday, February 9, 2010

Copper update and other musings

Early in January I posted a chart of copper prices with the title "Dr. Copper says the patient has recovered." I noted that the huge rebound in copper prices was a good sign that the global economy had recovered from its slump and was rapidly returning to health. Since then, copper prices have fallen about 15%, commodity prices in general have slumped, and so have equity prices.

The shorthand version for what has happened in the past month is a reversal of the "carry trade:" risk assets are down, and the dollar is up. Fear is up too, with the VIX bouncing from the teens to the mid-20s. Concerns over Greece and the stability of the EU are likely catalysts for the recent bout of nerves, but so too is the sudden rise of populist attacks on big banks (see my friend Don Luskin's article in today's WSJ on the subject), concerns that Fed and some other central banks are preparing to tighten monetary policy, and the fact that numerous countries, including the U.S., are being forced to confront the problem of out-of-control budget deficits brought on by profligate public sector spending practices.

Does this selloff in risk assets mark the end of the recovery and the beginning of a renewed bout of economic weakness? Could a Greek default really bring down the EU and/or the Euro, and ultimately infect the U.S. economy with another case of the economic willies? Is the global recovery so tenuous that it can't bear interest rates that move up from zero, or that it can't survive without government spending life support?

My position for the past year or so has been that the U.S. economy has recovered in spite of all the fiscal and monetary stimulus that has been thrown at it; that in fact the recovery would be stronger if it weren't for stimulus. I think fiscal and monetary stimulus are vastly over-rated. No one can prove what the government spending multiplier is, but I'll vote for it being negative. I don't see how the act of taking money from John and giving it to Joe can result in a stronger economy, and if Joe ends up being less careful about spending the money he's been given than John (which is not a very dubious proposition), then the result is clearly a weaker economy. And since when does printing money make an economy stronger? Throwing money out of helicopters probably results in new spending, but that is much more likely to just push prices up than it is to cause anyone to build new plant and equipment.

Consequently, I can't get concerned over the approach of the end of stimulus, which I think is the dominant source of the market's fear in recent weeks. Bring it on, I say. Let's have higher interest rates right now, so we can worry less about what how high inflation might go in the future. Let's have spending freezes or outright reductions in spending right now, so we can worry less about how high future tax burdens might have to rise. Let's please return to the old-fashioned notion that people know best and government knows least about how to run our lives and our businesses. Let's hope that the Tea Party ends up throwing a bunch of misguided politicians of both parties out of Congress come this November.

If lower copper prices and a reversal of the carry trade are signaling anything, it's that the world may be stumbling its way to a better set of policies, and that is good news.


UFormula said...

Your article is like the market. Good news is good news and bad news is good news.

Copper up = the global recovery is taking hold
Copper down = Policy is getting better.

What is your view as to the stock market performance till the end of the year?

Scott Grannis said...

My prediction for the stock market is a gain of 10-20% for 2010. That would imply a rise of 15-25% from today's levels.

Brian said...


You stated in this post that you believe the stimulus was bad for the economy. With this quote are you making a specific distinction between stimulus and bailouts or are you specificially referring to stimulus?

Do you think the economy would be stronger if we didnt throw money at FNM, FRE, AIG, etc??

Scott Grannis said...

Brian: here I was referring to the stimulus spending only. I think I would have to say that the bailouts have also been bad for the economy. They perpetuate flawed structures (FNM, FRE), and they introduce moral hazard.

UFormula said...

I agree with you Scott, but what other options were available at the time? ....

I personally would have voted for nationalization and let capitalism work its magic...but alas we took the path most (or short-term easiest) traveled by.

Scott Grannis said...

That's a good point. It could be argued that since we created flawed structures (FRE, FNM) in the first place--since government had already screwed everything up and it was bound to collapse at some point--that we had no choice but to bail them out. We allowed them to get too big, we forced them to lend stupidly, and we gave them an implicit government guarantee.

alstry said...

I don't see how the act of taking money from John and giving it to Joe can result in a stronger economy, and if Joe ends up being less careful about spending the money he's been given than John (which is not a very dubious proposition), then the result is clearly a weaker economy.

BINGO!!!!! Probably one of the clearest and most accurate statements ever presented in the financial press.

Now the only question is did our collective retirement accounts, pension funds, and community banks loan our nation's savings from Johns and hand it to Joes without collective Johns ever even knowing they loaned the money?


Do you think the primary driver of our economy for the past ten years was simply extend and pretend until the savings came to an end?

Public Library said...

LOL. I totally agree. Stop kicking the can down the road. We should have taken the pills in 2008 and early 2009.

Daniel said...

Scott, what do you think about Bernanke's exit strategy that he began outlining today? Sounds like raising interest rates is definitely on the horizon, and Wall Street seems to be responding okay to this today.

Scott Grannis said...

alstry: I'm sure we have wasted gobs of money on transfer payments and ridiculous government programs over the years. But there is no way we have squandered all of our savings. The U.S. economy has grown unquestionably (30%!) in the past decade. You can't fudge or dismiss numbers like that. We've grown because we've invested in capital goods, education, new plants, new infrastructure, etc., and the productivity of the average American worker has also increased 30%.

Scott Grannis said...

Daniel: Bernanke is still moving very slowly. The bond market's expectations for the future of short-term interest rates haven't changed much in recent weeks. Markets seem to be thinking that Ben is simply laying the groundwork for what we all expected him to do anyway.