Investor/An insider's guide to the market: Persistently low rates of producer and consumer price inflation have been a factor of the economic landscape in recent years despite strong global growth.
Occasionally, central bankers beat the drum regarding the need for vigilance lest the inflation genie escape from its bottle. But the fact that inflation has remained so well-behaved is puzzling to many economists, given that monetary policies have been so stimulating for many years now.
Despite the interest-rate-raising actions of the US Fed, dollar interest rates and bond yields are still very low in a historical context. Euro interest rates and bond yields are also low in real and nominal terms, while Japanese official rates remain at zero.
As well as low interest rates and bond yields, growth in the monetary aggregates and in credit has been running way above growth rates in nominal GDP for several years.
While this expansion in money and credit has not been felt in general consumer prices, it has had an impact on price trends in two important markets, one local the other global.
Property markets are local in nature, being driven by the forces of supply and demand, often within quite small geographical boundaries. Yet property markets throughout the globe are in a synchronised and long-running bull market. The Irish property boom stands out due to its longevity and scale, but many other property markets in Europe and America have experienced similar booms in the last few years.
Notwithstanding the fact that demographic fundamentals are playing a part in most of these markets, a common driving force is cheap money and easy credit.
The second area of activity that is feeling the effects of easy money is global commodity markets. The prices for most major commodities such as oil and metals have been rising consistently for several years. In recent weeks the pace of such price rises has accelerated to such an extent that many commodities have reached price levels that have not been seen for more than 20 years. Silver recently hit a 22-year high of $12 a troy ounce. Crude oil is close to breaching the $70 threshold over ongoing supply worries which have been exacerbated by recemt sabre-rattling over Iran's nuclear programme.
One of the strongest commodity markets has been copper, which has just touched the $6,000-a-tonne level. The price of copper has risen fourfold since November 2001 and has more than doubled since early last year. The price of copper and zinc is now so high that one leading US analyst has pointed out that, if current price trends persist, it may soon be worth melting down US one cent coins, as they will be worth more than their face value.
Just like most commodities, price rises in copper have been driven by growing global demand due to the strong US and Chinese economies. Producers have struggled to lift output fast enough, leading to excess demand.
However, the fundamentals of demand and supply only tell part of the story. Several hedge funds are believed to have built up large copper bets and this speculative demand is playing a big part in the copper bull market.
More generally, increasing interest in commodities as an asset class from both long-term investors and speculators has played a significant, if unquantifiable role in the generalised commodity bull market. Speculators have always played a big role in commodity trading, but traditional speculators have now been joined by hedge funds.
Another recent phenomenon is the interest being shown in commodities by traditional long-term investors, who are desperate to diversify into alternative assets. For example, last month Sainsbury said it planned to invest about 5 per cent of its fund in commodities. Last year, one of the UK's largest pension funds, Hermes, launched a commodity fund into which it invested £1 billion (€1.44 billion) of its clients' funds.
This weight of investment and speculative money seems set to lead to further price rises in many commodities. For the brave and skilful there could well be further high returns to be earned.
Investor, though, is not tempted into such a frothy market. However, it is just another signal that the environment of ample liquidity is alive and well and will continue to be an important factor in sustaining the current equity bull market.
