Saturday, February 23, 2008

Cause And Effect

It is hard to believe that it was only 22 days ago that I reported that the commodity price index called the CRB Futures index for the first time ever rose above the key 500-level. Yesterday it closed at 546.32, up 9% in just 22 days. The CRB spot index has also risen sharply, up 6.3% to 466.69.

And The Economist's commodity price index is up 8.5% during these 3 weeks, to 252.2.

What has caused this amazing commodity price bull market? In part, it reflects the structural commodity shortage that Jim Rogers discussed in his book Hot Commodities. But as I pointed out in my review of that book, it is also a result of the Fed's inflationary policies. If you look at money supply data for the last few weeks, you can see that MZM and even M2 have sharply accelerated in growth during the last four weeks. During the last few weeks of 2007, growth in these monetary aggregates had slowed down considerably from the rapid pace of August-September, but the Fed's dramatic rate cuts of January 22 and 30 have helped kick-start them again.

M2 is up 1.87% during the latest 4 weeks, while MZM (which is M2 minus time deposits and plus institutional money funds) is up 3.37% in the latest 4 weeks. It is not a coincidence that the sharp acceleration of the commodity price boom of the last few weeks was preceded by a sharp acceleration of money supply growth.


Anonymous newson said...

what's really interesting is this "blow off" phase in the commodities is occuring whilst the shanghai bourse is starting what appears to be more than just a technical correction (30% off its november high). something's not right here.

2:55 PM  

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