Sunday, January 2, 2011

A return to prosperity

As we start the new year, we can give thanks for the very impressive comeback in equity valuations that has played out over the past 21 months. The capitalization of global equities is now only 16% shy of its all time high, which occurred in late 2007, and just over double what it was at that awful bottom in early March 2009. A full recovery to the 2007 high will add $10 trillion to global market cap, and I see no compelling reason to think it won't happen within the next year or two. Two years ago, financial markets were all but convinced that the global economy would be mired in a deep, deflationary depression for the next several years at least. Fortunately, the future turned out to be a whole lot better than what it was supposed to be.

Mark Perry has some related comments here.


Cabodog said...

Just noticed a letter-to-the-editor in our local newspaper where the author was complaining about the recent increase in train traffic through our town.


Benjamin Cole said...

2011 will be a good year.

BTW, the Jeffries-Reuters commodity index is well below pre-recession highs,

Here is what they say about themselves:

"For more than 50 years, this world-renowned index has served as the most widely recognized measure of global commodities markets. As a benchmark, the Thomson Reuters/Jefferies CRB Index is designed to provide timely and accurate representation of a long-only, broadly diversified investment in commodities through a transparent and disciplined calculation methodology."

The Jeffries-Reuters index topped at 475 in 2008, and then bottomed at 200 and change in 2009, and now has recovered to the 330 range. Still way, way off of all time highs.

It is best to look at a range of indicators when evaluating the economy. said...

Interest rates aren't going anywhere soon.

Scott Grannis said...

The CRB indices I follow are at all time highs.

Benjamin Cole said...

Scott Grannis-

The cover of the LA Times business section used the Jeffries-Reuters index on their cover yesterday. I am not saying it is a better index. I just notice it is an index of commodities put together by name outfits, and it is far off of its highs, and renders a different picture than the index you use.

Frankly, I don't know which is the best commodities index.

Also worth noting is the

"The S&P GSCI® is widely recognized as a leading measure of general price movements and inflation in the world economy. It provides investors with a reliable and publicly available benchmark for investment performance in the commodity markets, and is designed to be a “tradable” index. The index is calculated primarily on a world production-weighted basis and is comprised of the principal physical commodities that are the subject of active, liquid futures markets."

This S&P GSCI index paints a much, much different picture than the one you have been painting, and shows deflation in the last five years, and a 0.52 increase in the last one year.

S&P GSCI 1 year .52% 3 years -13.82% Five Years -6.85%


Agina, I suppose each index has strengths and weaknesses. Nevertheless, two major indexes show a radically different picture of commodities markets than the index you have selected.

It is always a good idea to check around, look at as many sources of data as possible. said...

S&P GSCI is used in GSG ETF and is well below it's all time high. It is skewed toward energy. Lacking the metals and ag exposure to, say DJP, or GCC it has underperformed them. But, it keeps me in gas money.

Scott Grannis said...

The only commodity indices that are not at all-time highs are those that have a significant amount of energy. Oil, obviously, is still well off its 2008 high. I think its best to keep energy prices separate from other commodity prices. In real terms, energy prices are at all-time highs. Other commodity prices are at all-time nominal highs, but far below their real highs. Mixing these two together in one index is not a constructive exercise in my view.

Steve Fulton said...

The GSCI spot index was up 20.44% for the year ended 2010. You have to be very careful when looking at commodity indices based on futures contracts--especially those whose constituents are in contango (like oil).
For instance front month (Feb 2010) WTI was $79.28 on Dec 30 2009 and currently WTI for Feb 2011 is $91.88. That's an increase of 15.9%in the front contract. However the oil complex was contango on dec 30 2009 meaning that the Feb 2011 contract was priced at $85.08 on that date. So an index based off that contract is only up 7.9% (91.77-85.08/85.08). But I think it's pretty clear that if oil today is up almost 16% -- that's the number you care about. Not the shape of the commodity futures curve.

Steve Fulton said...

Also, the JCPI is a cool index--but it rebalances monthly. In other words it doesn't have the same weightings from month to month and certainly not remotely the same constituent weightings from year to year. I know the guys who developed the index and understand what they were up to, but unfortunately since it's makeup changes, and at times dramatically, it's not very helpful figuring out what prices have done.