(Mis)leading Indicator?
Commodities predict the economy -- or not
interactive.wsj.com
By Nicholas Elliott
You'd have to look back to before the original age of bell bottoms to find prices as low as they are now for some commodities. But is it worth looking if commodities are just flotsam bobbing in the wake of the omnipotent stock market?
When commodity traders spend as much time talking about the stock market and the dollar as the fundamentals of their own sector, perhaps that does reflect an understanding that they're a significant part of a bigger picture.
Michael Churchill at Polyconomics thinks so. Commodity prices are the first gauge of inflation and deflation, he says. Because commodity prices are spot prices, or prices for immediate delivery, "there's no pricing power and no brand power, there's no contract length over which you have to unwind prices," he explains.
The long-standing decline in commodity prices foretold of a current deflation, evidenced by the weakness of gold. But commodities have now fallen so much that they've exceeded the weakness of the economy and have some room to recover, Churchill thinks. "They've already fully adjusted for the monetary deflation," he says.
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But Wainwright goes on, "falling commodity prices, far from being a leading indicator of economic contraction, have historically been associated one year ahead with higher -- not lower -- economic growth." John Carr, a senior research associate at Wainwright, says that inverse relationship again shows commodities following rather than leading monetary stimulus. "It's a result rather than a cause," he says.
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More commodity producers will have to go out of business or produce less before the price cycle turns. Then it will be clearer what kind of indicator commodities are.
Wheat prices made a two-month high as export sales picked up and worries spread about the impact of heavy rain on Argentina's crop and diverse weather problems in the U.S. December wheat rose 13 cents from Monday's close. |
