Freight Indices Steam Toward Recovery

What Sayeth Commodities?

Consider the Goldman Sachs Commodity Index. Of the four principal commodity indices, this index is the most heavily weighted toward energy, and therefore is subject to various seasonal and cartel distortions. But its strong correlation to the Baltic freight index since 1997 is telling.

Commodities Sail Higher

Source: Bloomberg

Both of these indices are sailing higher at the moment, and neither could do so in the absence of strong industrial demand somewhere in the world. The strong commodity performance also stands as one of the few compelling arguments against deflation at the moment.

So let's wrap all of this up as we prepare to kiss 2002 goodbye and good riddance. The Fed and other central banks have been pouring money into the system, to little avail. Bond yields have plunged, economic activity is perceived as soft, war fears abound, everyone's boss is in the slammer and Michael Jackson is still loose upon the land.

The whole situation reminds me of trying to start a charcoal barbecue by squirting on ever-greater quantities of lighter fluid. At some point, the economy will ignite and profits will abound. Money will flow abruptly from bonds to stocks, and the Fed will start to mop up liquidity in response. We'll enjoy a few strong quarters, maybe a year, in stocks before the party cools off.

Here's another bold prediction while I'm at it: Greenspan will resign near the rally's top, accept congratulations all around and leave his successor with the cleanup chores. You did hear it here first.