More than a coincidence, a correlation

I’ve alluded to the importance of correctly interpreting the steep downturn in commodity prices.  Is it evidence of a deflationary, imploding economy?  A return to normalcy after a speculative bubble?  Overshooting to the downside by investor liquidation?  Critical policy decisions rest on properly understanding the forces at work.  To the degree that the rapid price decline legitimately represents deflationary pressure, it may well be time to pull out all the stops on a fiscal stimulus.  If not, such spending will only unleash inflation later.

My friends over at Accidental Hunt Brothers posted an interesting study by Don Newell at Probalytics.  Newell points to the breakdown of traditional market relationships as evidence that investment dollars (index speculation) were behind some of the rise in commodities.  I observed similar patterns in dollar/crude oil relationships in the first half of the year.  You can read about it here.

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