Two More Indicators of a V-Shaped Recovery

First is a 5-year chart of Bloomberg's constant maturity commodity index, which is composed of 26 different commodities in five major groups: energy, agriculture, industrial metals, precious metals, and livestock.

As the chart shows, commodity prices have recovered about half of what they lost last year, and are still rising. I believe this demonstrates two important developments: 1) Global demand has rebounded significantly from its end-2008 lows, and continues to firm; and 2) central banks around the world are pursuing accommodative monetary policies, which are facilitating the recovery since they have satisfied the fear-induced demand for liquidity.

This may well end in another inflationary bubble, but the more important thing to focus on now is that the commodity price surge is a good coincident indicator of the rebound of global growth and as such is extremely positive.

Second, U.S. industrial production in September rose more than expected. Since bottoming out last June, industrial production is up at a 11.8% annualized rate. Japanese industrial production suffered more, but has rebounded even more strongly. European industrial production is also turning up.

I think that when forces like these are set in motion they are very hard to stop. The process started about a year ago when global demand collapsed due to fears of massive bank failures. Inventories rose involuntarily, so production was cut back. Now demand has returned, inventories are declining and production is being ramped back up. This is a classic inventory cycle that would be difficult to derail, especially since all the coincident indicators of demand (e.g., commodity prices) are still very strong.

In the end, this recovery rests on a foundation of renewed confidence and declining fears. The recovery is now in a positive feedback loop where increased confidence leads to increased demand and production, which in turn leads to increased confidence.

Comments

[markfl:]

Pundit wrote:

"In the end, this recovery rests on a foundation of renewed confidence and declining fears. The recovery is now in a positive feedback loop where increased confidence leads to increased demand and production, which in turn leads to increased confidence."

Super, only U of M's confidence survey (October) came in lower than expected and lower than September. It would be nice to see some "V" shaped data to go along with the rhetoric.

Oct 16 01:33 PM

[market ace:]

Dream on dude. The increase in commodity prices is primarily the dying dollar, not increased demand for commodities except a limited increase from China. The surge in prices simply indicates that more people are buying commodities to hedge against the death of the dollar.

Oil is the ultimate example where demand is declining, inventories are at absird levels yet the price goes up.

I have yet to see any growth and contimued "less bad" and relentless unemployment will not lead to any V shaped recovery. There is still so much misery inthe financial markets and banks to come that it will drown any recovery in spite of glowing gov't and media hype.

The rising stock market is nothing but more greed and pumping with endless cash being fed to Wall Street by the FED. There is no reality behind this market rise, but reality will again wipe out the stock market soon enough..

Oct 16 02:03 PM

[TTurk:]

I am always tickled at how people relate two things and make macro economic predictions based solely on those. "Rising stock prices signal a strong recovery." "Rising commodity prices signal a V shaped recovery." "Industrial production is rising predicting a V shaped recovery."

The destroyed wealth and credit quality of the consumer, the inability and lack of incentives for financial institutions to lend, national debt levels that will exceed those of many third world countries in the next few year mean nothing. Higher taxes by federal, state and local governments to balance budgets will not have any adverse affect on spending either.

If you ignore the fact that lack of jobs, income and an overleveraged balance sheet will not impact the consumers ability to provide a sustainable recovery, then you can believe that US comsumers will soon be buying 12 million cars a year and building a million new homes a year.

I think I can see the V coming myself.

Oct 16 02:23 PM

[The Geoffster:]

Would that be V as in valetudinarian?

Oct 16 02:32 PM

[thiazole:]

It is funny how often I see "high unemployment" being cited as a reason we can't have a V shaped recovery. How many V shaped recoveries can you think of that happened when unemployment was low? Honestly, I almost think high unemployment is almost mandatory to have a V shaped recovery. So why do so many people constantly state the opposite?


On Oct 16 02:23 PM TTurk wrote:

> If you ignore the fact that lack of jobs, income and an overleveraged
> balance sheet will not impact the consumers ability to provide a
> sustainable recovery, then you can believe that US comsumers will
> soon be buying 12 million cars a year and building a million new
> homes a year.
>
> I think I can see the V coming myself.

Oct 16 03:11 PM

[Gyoza Mimi:]

...this recovery rests on a foundation of renewed confidence and declining fears.

It's always good to know that the recovery is based on optimism and not fundamentals. It gives you that confidence feeling.

Oct 16 05:00 PM

[j-dub:]

"Two More Indicators of a V-Shaped Recovery"

and one more indicator of an ivory tower economist.

Oct 16 07:25 PM

[Dave Wrixon:]

Commodities are prices are a global phenomenon.

This depression is going to be much more localized. The US economy is going to tank possibly taking parts of Western Europe with it to some degree. But this is all about New World Order, not Global Depression.

Just get the hell out of the Dollar and you will be fine.

Oct 16 07:44 PM

[Gary A:]

It looks like Bank of America is having an upside down "V" shaped "recovery". Does that count, lol?

Oct 16 08:32 PM

[Wildebeest:]

"As the chart shows, commodity prices have recovered about half of what they lost last year, and are still rising. I believe this demonstrates two important developments: 1) Global demand has rebounded significantly from its end-2008 lows, and continues to firm; and 2) central banks around the world are pursuing accommodative monetary policies, which are facilitating the recovery since they have satisfied the fear-induced demand for liquidity."

pretty dumb drawing conclusions about real demand from your chart. As others have pointed out, commodities are traded in US dollars. How has the dollar been travelling? If you wanted to present anything more than a superficial analysis you would have investigated whether or not trade data confirmed demand, or commodity stockpiles confirmed demand etc. Nope.

Since you like commodities how about explaining why copper, a so-called bell weather commodity, has rising stockpiles at a time of lower output (than 08). If demand has rebounded why are stockpiles rising when supply is lower? If you focus solely on price you'll be hoodwinked by the dollar weakness and speculative pumping (courtesy of free money from the Fed).

Oct 16 11:45 PM

[Glen L.:]

I'd like to see a definition of recovery from that author. If recovery means the Fed and the government have managed to inflate 2 more bubbles, we're indeed recovering. It's like the recovery experienced by a dying cancer patient who shoots up with heroin. If recovery means more jobs created by productive private markets, and slow, sustainable growth of the economy without inflation, recovery is obviously a long, long way away, and a bone marrow transplant will have to be suffered through first.

Oct 17 02:26 PM

[The Recusant:]

Unfortunately the increase in industrial production has been attributed to the auto makers increasing their car production targets in hopes that the "cash for clunkers" stimulus will encourage future sales. And as others have pointed out, the commodities increases are rather a vote for the lack of confidence in the U.S. dollar than confidence in a reviving economy. As for the skyrocketing stock market, look who the players are. The retail investors and consumers are still out of the action as they await the second downturn to the economy. The only players are the hedge funds, mutual funds, and financial investors. They are effectively feeding off of themselves as they push the Dow up. But even they know that someone will be left holding a decimated bag of stocks when the rush is on to cash out for the profit.

More importantly would be to focus on the number of commercial and private mortgage defaults that are increasing and questioning why even more have not occurred. With the unemployment nearing 20% (in reality, not by government reports), one would see that the number of defaults should be rising faster. Banks may be delaying foreclosing on defaulted mortgage loans to keep the books looking better than they actually are, which they can then claim as healthier assets. But this, like the credit card defaults, is a ticking time-bomb.

The hint of increased M&As are being seen as a positive sign of recovery when they indicate the desperation of companies to gobble up competitors to capture new clients in order to stay afloat. With each acquisition, the clients are stripped from the old company and the redundant workers are dismissed, adding more to the unemployment line. The banks have pulled this off very effectively using government funds and soon more and more companies will follow suit as they have no alternative. This will seriously effect the small business owners, the back-bone of our economy and employment pool, and push the bigger acquiring companies further into debt.

At this period in our economic history, one must be very cautious of the "good news" reports that come from the traditional sources. Big banks making huge profits are irrelevant to the recovery and companies that have seen increased sales through typical cyclical sales or stimulus packages are showing foolish sales expectations for the future. Pay attention to fundamentals, not of companies, but of the overall economy on the street...Main Street. Until the government can stimulate an enormous growth in employment, possibly through a huge alternative energy project or some other massive public project, the economy will continue to deteriorate while Wall Street whistles in the dark.

Oct 17 04:44 PM

[Albertarocks:]

On Oct 16 02:32 PM The Geoffster wrote:

> Would that be V as in valetudinarian?,

Very good! Yes, V as in "valetudinarian".

Or perhaps V as in "dream on".

Oct 18 11:03 AM

[bigbear4511:]

Does the millions of people who are unemployed care about a V shaped recovery when they are still jobless and are about to loss there homes. V shaped recovery is a government creation. Despite the increase in the stock market the United States has never been in a worse position than it is now with a ballooning debt growing at unprecedented levels.

Oct 20 05:24 AM