The global recoveries in production and world trade for the two years ended Q 1 2011 was very
rapid and brought output and trade to new high ground. In my view, the global expansion was on its
way to overheating over the course of 2012 with a cyclical surge of inflation in prospect. Over the
past three - four months we have seen a dramatic slowing in the growth of output and trade. This
was caused by the Japan quake /tsunami damage to production in the supply chain, firmer monetary
policy by many central banks and an end to inventory hoarding by processors which saw industrial
commodities prices double.
So, the global economy has "soft landed" -- demand has slowed sharply but supply has continued to
expand, opening more of a gap between the two. The economy has come quickly off the course of
eventual serious overheat, and now the focus has shifted to how long the slowdown may last
and whether some major economies could be subject to a downturn during this slow period.
Notice as well, that with an easing of factory operating rates, global inflation thrust has backed
off markedly, particularly in the commodities markets. This has made it tougher for producers and
processors to readily generate inventory profits and is clearing the way for central bankers to have
leeway to moderate policies in favor of eventual stronger growth.
From my perspective, it looks like G-20 cooperation has been effective so far. There was powerful
stimulus and monetary accomodation in 2009 and going into 2010, and the bid to slow the rapid
pace of growth started well ahead of the overheat zone, when policy flexibility rapidly diminishes.
It is difficult to "soft land" an individual economy and, perhaps, vastly tougher to do so on a global
scale. That leaves us with the recognition that we have risky business afoot. It also suggests that
a global perspective is in order in assessing risk / return potential in all of the various markets.
I would like to add one more observation here. Central banks of size and consequence in the
world now carry a special new burden -- dealing with the vast influx of "round trip" financial
players in the commodities markets. Sustained speculative activity in these critical markets
in response to the policy drift of the major CBs can prove profitable to players on the right side
of the trade, but dangerous to the effective implementation of macro policy. At this stage of the
global expansion, moderate rather than dramatic policy gestures may be most appropriate.
For background, go here and scroll through the entire pdf file.
- Peter Richardson
- Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!