Commodities futures prices continue climbing. All commodities, not just oil; not just foodstuffs; not just industrial metals and chemicals. Every fungible, internationally-traded good has ballooned in price over the last several months, as Bloomberg’s chart of four commodities indices clearly indicates:
Is this a supply and demand-driven situation? Are all commodities simultaneously suffering either from an increase in quantity demanded, a decrease in quantity supplied, or both? Could such a thing even be possible in world ruled by randomness? Has the demand for Arabica coffee beans so grown that it should now be at an all-time high? What of cotton: Are people all of the sudden demanding several more shirts and pants such that demand per capita has reached, like the price, an all-time high? Has the cotton crop been wiped out by another weevil? The answer to all is emphatically “No”.
Commodities are on a tear because the dollar (the currency in which internationally-traded commodities are priced) is on a slide. Simple as that, as the following chart from the St. Louis Federal Reserve Bank of the dollar’s value against its major trading partners indicates:
It could be that industrial metals and chemicals are enjoying some increase in quantity demanded, as the world economy awakens from the stupor of the financial crisis and its attendant contraction in economic activity. But why should agricultural commodities be screaming higher along with them? Economic activity can increase five or ten percent a year during a good year. Eating, however, is distinctly and directly tied to the number of humans on planet, and their numbers aren’t increasing nearly as fast–only about 1% a year overall. Even oil, which has lately aggravated and agitated the American driving public, again, is not suffering from supply disruptions. Yet. It may eventually, if the Middle East unrest continues to spread, and in some aspects the increases in futures prices indicate the risk that it does. But for the short-term, i.e., the less-than-six-months time frame, the impact of the unrest on aggregate world oil flow has been negligible.
Some people like to say its those dadgum speculators. Get a clue. What else is a futures market but a market for speculation? The very premise behind commodities futures markets is speculation about the future.
It’s not just commodities. Stocks are screaming higher, too, as another chart courtesy of Bloomberg indicates:
So, too, are bonds, corporate and otherwise, as the following chart from the St. Louis Federal Reserve Bank indicates (the chart tracks yields, and in bonds, when yields go down, as they recently have, prices of the bonds go up):
But there is one asset whose value is declining in the face of all these screaming increases–housing, as another FRED chart indicates:
The crash in housing prices around 2007 is of course the precipitant for the increases seen in all other areas. Housing price declines initiated the near-failure of the financial system, and the Fed believes still mustn’t be allowed to fall too much, elsewise the financial system risks a relapse. So government programs ($1.5 trillion in GSE bond purchases; QE2, etc.) have been initiated to prevent the housing bubble from completely deflating, which explains the leveling off of the decline. But preventing price declines through monetary machinations inevitably causes price increases elsewhere, hence commodities, stocks and bonds have all been lately on a tear.
Do not–I repeat–Do not–be misled into thinking the overriding cause of price increases in any of these areas is supply and demand metrics. Supply and demand issues may play a supporting role in the prices for an individual commodity, but the villain in the price shocks is the hyperactively accomodative Federal Reserve. There is plenty of wheat, rice, oil, copper, coffee, etc., subpar corporate debt and stocks to go around. The problem is that the money supply and velocity grew faster than did the supply and demand of these assets, so the money lost value.
If you wish to know the true value of something, like a house, gauge it against a basket of market commodities, or if you’re lazy like me, just use oil. A barrel of oil will buy a lot more house today than it did only a couple of years ago. According to the US Census, median home prices peaked in 2007 at about $248,000, and are now (2010–the latest for which they have data) down to about $222,600, increasing a bit from 2009’s $216,700 (the National Association of Realtor’s data is very similar). Oil traded for roughly $40/barrel in March of 2009. Today it fetches about $105/barrel. At $105/barrel it would take about 2,120 barrels of oil to buy a median-priced house in 2010, whereas it took about 5,418 barrels in early 2009. At the rate things are going, before long, a car with a full tank of gas will be worth more than a house, and that’s a price comparison that communicates value exceedingly well.