Rising Commodity Prices Continue to Signal Recovery

I post this update to industrial metals prices because it is one of the key, market-based indicators that I follow, and it registered a new high yesterday that is 80% above its low of last December. Industrial metals prices are doing very well, and I believe that is a good sign that a) the global economy is recovering nicely, and b) monetary policy in most major countries is quite accommodative and needs to be tightened. I don't know how much of the rise in prices is due to easy money, but if I had to guess I would say about one third, with two-thirds being due to an ongoing strengthening of the global economy.

For most of this year, the economic skeptics have argued that higher commodity prices were a misleading indicator of global growth, mainly because they thought that China was mindlessly stockpiling commodities in an attempt to reduce its dollar exposure. I argued instead that this was an unreasonable assumption, because virtually all commodities were rising, global confidence was rising, monetary velocity was rising, swap spreads were moving back to normal, credit spreads were declining, and stock markets were rising. In short, I saw numerous indicators of recovery that all agreed with each other. The "China stockpiling" theory did a poor job of explaining how all these things could be happening.

Rising commodity prices were among the many "green shoots" that signaled recovery long before the market was prepared to believe in one. They continue to reflect a fundamental improvement in the economy, and they are sending a strong message to the world's central banks, especially the Fed, that a tightening of monetary policy is long overdue. The sooner the Fed gets the message, the better for everyone.

Comments

[jeremiah74:]

"I don't know how much of the rise in prices is due to easy money, but if I had to guess I would say about one third, with two-thirds being due to an ongoing strengthening of the global economy."

yes. but the on-going strengthening of the global economy is 100% due to easy money and fiscul stimulus.

so if they tighten its all over again.

and rise in commodity prices has a lot (2/3 my guess) to do with weak dollar.

so your arguments hear sound hollow and more wishful thinking than substance. as usual

Oct 27 08:49 AM

[Danny Furman:]

Another joke from the fortune cookie economist...

Oct 27 09:31 AM

[Mad Hedge F...:]

nde Those of you searching for the “newnormal” better take a close look at the China National Offshore OilCompany’s (CNOC) efforts to top Exxon Mobil’s (XOM) $4 billion bid fordevelopment rights to a giant new field off West Africa. This is onlythe latest chapter in a global bidding war for essential resourcesthey, and we, need. Long gone is the day when the Standard Oil Companyonly needed to deliver King Saud a new Cadillac every year to assurerights to his kingdom’s oil supplies, even though it often had to betowed by teams of camels, as there was no refining capacity yet on thepeninsula. Decades later, I was part of a SWAT team at Morgan Stanleywhose schmoozing kept the crude flowing and the cash surplusesrecycling. Having grown up in the desert near Indio, California, I wasthe only one in the company who actually liked caravanning out into thedesert to scoop up cooked rice with my fingers off of giant brassplatters, and guzzle illicit Johnny Walker Red, said to be smuggled inby a wayward member of the royal family. I never did get used to thesheep brains, though. But I digress. To the current generation of oiltraders, I might as well be talking about the Pax Romana than the PaxAmericana, which is now equally ancient history. The hard truth is thatthey are out there bidding against the new 800 pound gorilla in themarket, as are others for coal, iron ore, copper, gold, silver, wheat,corn, soybeans, and myriad other essentials. If you have any doubtsabout China’s acquisitive determination, look at the chart belowshowing that the Middle Kingdom’s outbound direct investment isoutstripping inbound investment for the first time. Will the PebbleBeach Golf Course next? For you and I, this means we can count on theprice of everything to go up in the future, a lot. Keep food,commodity, and energy ETF’s permanently on your radar, like thePowerShares agricultural (DBA), the Rogers International Commodities(RJI), and the Oil Trust (USO). Jim Rogers, are you listening?

Oct 27 11:11 AM

[Wildebeest:]

This guy claims to be an economist but makes no discussion of supply and demand. No mention of whether metals are in surplus or deficit, no mention of why stockpiles are rising at a time when supply is down on 08, no mention of why producer bodies form the opposite view to him and his price charts.

A couple of weeks ago the ICSG forecast copper consumption will be down 17% in the USA in 09 and is pessimistic about 10. Some recovery.

China stockpiling of commodities was not mindless. What was mindless was extrapolating stockpiling of iron ore, coal and copper to other minerals and metals where no evidence of stockpiling ever existed (eg. from China import data). But that's what you get when you follow price charts instead of looking at what is happening in the real world.

I've tried to use actual real world production and consumption data here.

seekingalpha.com/insta...

It may not be perfect but at least it represents an attempt to *think* about what is occuring rather than cheerleading and pumping based solely on a price chart while ignoring economic data such as metals supply and demand.

Oct 27 02:39 PM

[Shaftsinker:]

Wildebeest and the rest of you guys have to realize that the world is a much bigger place than America, and a global recovery as indicated by industrial metal prices does not mean America is out of the woods just yet. This American pessisim is severely clouding people's perceptions as to what's happening around the world.

The previous rise in commodities was due to robust growth in the developing world, there's no legitimate reason to believe it's not doing the same again. Recovery in other parts of the world was always going to come long before America's recovery.

Canada actually had a reduction in unemployment numbers recently amidst skyrocketing job creation in mining and energy sectors. As a Canadian working in the mining industry this sure sounds like a recovery to me, although a wouldn't expect an American (or even an Ontarian) working in the manufacturing sector to have felt it just yet.

Oct 27 03:08 PM

[Wildebeest:]

On Oct 27 03:08 PM Shaftsinker wrote:

> Wildebeest and the rest of you guys have to realize that the world
> is a much bigger place than America, and a global recovery as indicated
> by industrial metal prices

this is circular. You are asserting that the prices equate to a recovery. The point of my comment and blogs is that price does not mean recovery *in this instance*.

*Demand for the goods means recovery* and until we see signs of that price charts are like tea leaf patterns.

does not mean America is out of the woods
> just yet. This American pessisim is severely clouding people's perceptions
> as to what's happening around the world.

While I've sat on the sidelines with a chunk of my portfolio I remain long in resources stocks, particular iron ore. Reason? proof of genuine demand. The difference between iron ore and copper is that tea leave readers don't have iron ore charts to read and since they are allergic to accessing supply and demand info they don't follow it.

>
> The previous rise in commodities was due to robust growth in the
> developing world,

No doubt about that.

there's no legitimate reason to believe it's not
> doing the same again.

Er, actually there is a very definite legitimate reason why it is clear that this is not occurring now. Previously you had demand outstripping supply *globally*. Since the crash supply globally is down. Demand globally is down. The USA just happens to be an example of a worst case. I mentioned the copper usage forecast in my comment. With just under 3 months to go when the forecast was made by the industry body, the prediction was for Japan, Europe and USA copper usage to be down 17%. It is not just the USA where demand is weak. This is consistent with what we see with stockpiles. Stockpiles are rising. Stockpiles don't rise when demand is increasing, especially when supply is down. Stockpiles for all metals bar copper have risen consistently all year and nickel and aluminum are at decade highs. Copper had a period where the stockpile dropped. We know from the data (LME, Chinese import stats) that china was a big buyer when the price was lower. Since then the stockpile has risen again (and chinese copper imports have dropped back)

Shanghai copper stockpiles have been rising all year also by the way:

seekingalpha.com/insta...

> Recovery in other parts of the world was always
> going to come long before America's recovery.

> Canada actually had a reduction in unemployment numbers recently
> amidst skyrocketing job creation in mining and energy sectors. As
> a Canadian working in the mining industry this sure sounds like a
> recovery to me, although a wouldn't expect an American (or even an
> Ontarian) working in the manufacturing sector to have felt it just
> yet.

So why are miners generally cautious and at time unconvinced. Have the read the BHP reports during this year?

Demand is currently not zero. Stuff is still being mined and refined. i.e. people are employed. It is just that demand is weaker than it was hence miners are producer more than what people currently need. Free money and higher prices, regardless of the cause of the higher prices, are obviously good news for the mining industry and will encourage exploration and development. Just don't confuse price with an economic recovery. Conditions are totally different to pre-crash.

Oct 27 04:35 PM

[Mr. Big:]

I wouldn't look to commodities prices as a signal for recovery. In the current circumstance, as was mentioned in a post above, commodities went up in price mostly due to the rapid erosion in the purchasing power of the USD. When compared to a basket of international currencies, commodity prices actually FELL.

In that sense, the high commodity prices are telling us that something is horribly wrong with the economy.

Oct 27 09:54 PM