Global Economic Supply & Demand

Global economic industrial output did reach a record high this spring and there is only rather
moderate excess production capacity in the system. The steep "V" shaped recession / recovery
pattern of output did produce enormous but hardly sustainable positve momentum in production
measured yr/yr over the 2010 - early 2011 interval. Since then, the pace of expansion momentum
has decelerated. Output growth yr/yr has dropped down to about 4% -- in line with the long term
average. For the financial markets, shorter term shifts in the momentum of output growth have been
as important to pricing as has the overall trend and the level of production.

Sensitive materials prices and broader commodities price composites made cycle - to - date
peaks in the spring of 2011. Ditto the oil price. Concerns have mounted to reflect no further QE
by the Fed, decelerating production growth in China, the major buyer of an array of commodities,
and the fall in Euro area production momentum from positive to negative as recession appears to
be taking hold. China appears to have just wound up a period of tight money designed to
arrest intense real estate speculation only to find just how tough it is to fine tune an economy
with a blunt instrument like monetary policy. China's industrial production declined outright in
in April, real estate prices are falling and inflation has turned more subdued. This has prompted
Premier Wen to urge an increase in targeted stimulus and further easing of monetary policy
to restore more positive economic momentum. But do not expect too much as it is doubtful
China wants to trigger off another monetary / credit bubble. The Euro zone has suffered for
two years with a squeeze of monetary liquidity. That partly reflects capital flight but also the
bizarre and dangerous machinations of former ECB chair J. C. Trichet. Euro area liquidity is
improving as the ECB acts more aggressively to liquify the economy, but it is an uphill battle
as the banks are under mandate to improve capitalization ratios, a task they are working at
via closing the loan windows. In the UK, well, the confidence fairy is a no show despite a
shiny austerity program. Finally, the US faces an oncoming political imbroglio over fiscal
policy in a national election year.

So, it is far from clear that global output growth can maintain the long term average of 4% going
forward. China has fiscal leeway to complement monetary policy, the Fed is husbanding its
resources as the political clown act warms up, and ECB chair Draghi -- no shrinking violet,
thank God -- must look at every lever he can conjure to keep the Euro area from sinking further.

The forgoing comes as no big news to the markets. The "risk off" trades are overbought, and the
"risk on" trades are oversold. Near term, I think it will be very important to see whether China
can settle its nerves and put some push behind re - invigorating its economy.