Friday, September 24, 2010

Commodity recap






These charts represent the major components of the Journal of Commerce Index of commodity prices (top chart is the entire index). As should be obvious, there has been significant price appreciation over the years in all commodity prices. I've indexed all the charts so that they are equal to 100 in early Nov. 2001, which was the bottom for an overwhelming number of commodity prices. Gains since then range from 80% for miscellaneous commodities to 400% for petroleum prices. (My thesis has long been that this low in commodity prices was in large part the result of very tight Fed policy from 1995 through 2000.)

When so many commodities (the majority of which do not have futures contracts tied to them) rise by so much over the same period, I think it is logical to assume there is a common denominator or two at work behind the scenes. The prime suspects would be a) accommodative monetary policy and b) global growth. And the implications for investors is also straightforward: there is no reason to worry about a double-dip recession or deflation.

8 comments:

  1. The Japanese economy is one-half of the size of the US economy, and so is the Chinese economy. So together they have roughly the same GDP as the USA..

    Both are much larger direct consumers of commodities, as they are manufacturing-export driven economies.

    Japan has followed a tight-money policy since 1990, more or less, and commodities prices have ranged all over the board. The yen has been incredibly strong. Their economy has been feeble, but growing slowly.

    I wonder if at the BoJ they ascribe rising or falling commodities prices to the yen and their monetary policy. Or at China's central bank.

    China has had a bullish monetary policy for much of the last 20 years, and its demand for commodities has obviously skyrocketed.

    In oil markets, much of oil price bullishness is ascribed to demand from "Chindia." I am not as familiar with other commodities, but it would not surprise me to find out that rising Chindia demand is pulling up prices.

    Seems to me commodities are attuned to real demand and wealth in the booming Far East, much more than to US monetary policy. (BTW, Thailand has been growing at healthy 5 percent rates for years).

    Oil is a special category, with supply rationed by a cartel, and it is in play on the NYMEX.

    I sense the world is de-coupling from the USA more with each passing year--and no wonder, there are 2 billion Chindians, there are 100 million Japanese with a strong yen, there several hundred million Europeans, and Brazil is booming.

    All good--market reforms are propelling populations upwards. (Also, oil states are big importers).

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  2. "I sense the world is de-coupling from the USA with each passing year."

    Benj, I think you are right...and I think it is both positive and inevitable. The US has promoted globalization to provide markets for the output of underdeveloped countries. It has guarded the world's sea lanes with its Navy, confronted and defeated the world's tyrants, provided a global reserve currency, defended human rights, brokered peace talks between hostile neighbors, and as Colin Powell so famously said, "asked nothing in return except the land on which to bury our dead".

    Like an adolescent the world is growing up. Already emerging markets are outperforming ours, currencies are stronger, populations are younger, economies more vibrant. Sometimes I think we should be more like a proud parent, but a wary one. These offspring will devour us if we allow them to. Time to get our act together. Can't wait for november.

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  3. John,

    Gordon Gekko said "Parents are the bones children use to sharpen their teeth" I think it may be well beyond the time we stop burying our dead in defense of our grown children.

    Btw the movie is awful..just awful

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  4. Don,

    It appears to me that your sentiment is gaining in popularity by the day. No question the US military will evolve in that direction, IMO.

    Nice to hear from you again.

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  5. I wonder if the FOMC looked at these charts? It would seem they did not or think the U.S. is separate from the data flow.

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  6. John-

    Who wants to close sea lanes? China, the big exporter? Russia, who exports oil?

    I am not aware of any power on earth, other than a few Somali pirates, who want to close sea lanes (and even they want sea lanes open so they have continued prey).

    Our military is inventing missions, like all public agencies. We now spend more than we did at the height of the Cold War on our military, and are only enemy is a loose confederation of punk terrorists.

    I always say, I wish I could vote for Eisenhower again. He said never to get into a land war in Asia, and that every bullet was a mouthful of food out of some child's mouth. He refused to prosecute Truman's war in Korea, and pulled the bulk of troops out, leaving the DMZ in place.

    We are not starving anymore, but every bullet is $1 (okay, $10 at Pentagon prices) out of the job- and wealth-creating private sector.

    Bayonets make very poor shovels.

    We are spending double (adjusted for inflation) on the military that we did in 2000. Our military has ballooned from an already exaggerated form.

    Some people think we we threw enough money at domestic problems, we can make America a fair and prosperous place. Maybe

    Other people think if we throw enough money (gigantic gobs of money) at the world's problems, we can make the world a fair and prosperous place. Maybe not.

    $3 trillion and counting in Iraqistan.

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  7. A great deal of the inflation generated by Greenspan's low interest rates manifested itself in the housing bubble and in dollar based foreign economies. The dollar is a global reserve currency and much of world trade is conducted in dollars. If China grew quickly in the 00s there is no reason to think that commodity suppliers were unable to expand capacity to accomodate that growth. OPEC would like us to believe it controls the oil price but it behaves exactly like any other commodity.

    Recent history illustrates why CPI targeting is a poor way to gauge monetary policy.

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  8. Charles-

    Bernanke says it was a gusher of capital from Europe and the Far East that fueled the real estate bubble. Remember, both residential and commercial r/e have been whacked.

    Other (Scott Sumner, an excellent monetarist, suggest the Fed was not sufficiently bullish and essentially yanked the monetary rug out from under the economy.

    Given that inflation is dead, I think Sumner may b onto to something.

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