Global Economic Supply & Demand ***

Global industrial production hit a cyclical peak in Aug. but declined by 0.4% in Sept. as both
Europe and Japan swung markedly negative. After rising rapidly from mid-2009, through Feb.
2011, production growth has been modest in 2011. Measured yr/yr, growth has slowed from an
unsustainable 12% in late 2010, down to just 5% through Sept., and is showing a significant loss
of momentum on a trend basis. With the slowing of production growth this year, a move up to an
overheated economy late next year has been averted. Global capacity utilization has eased mildly,
and sensitive materials prices have fallen a sharp 17.5% as producers have throttled back on
building materials stocks. The sharp downturn in output underway in Europe, if it continues, will
lead to the development of more slack on a global basis ahead, and will serve to remove more
pressure on inflation composites.

With fiscal stimulus programs started in late 2008 and running into 2010 now past, and with
monetary tightening in evidence through 2010 and into 2011, the global growth profile is
changing rapidly with production growth on trend to zero out or worse yr/yr by the end of 2012.
The emerging negative profile for growth suggests a significant moderation of inflation, but the
risks of coordinated fiscal and monetary policy tightening are becoming more evident, as global
purchasing manager economic activity surveys show a rapid moderation in order rates. As well,
the rebound in global trade -- a major bright spot in the economic recovery both globally and
for the US -- is flattening out and is losing positive momentum rapidly.

I can see room in the UK, EU, US and in China to ease monetary policy jointly in 2012. The
outlook for fiscal policy initiatives is dim now, so policy assist, if it develops, will be milder
and less direct. G-20 let its Nov. conclave in Cannes go by without coming to grips with a
derteriorating global economic situation, but central bankers, perhaps of necessity, are more
attentive.

The EU presents a special and possibly critical situation through 2012. Major EU banks are
too highly leveraged at 20 and 30:1. They are only now reserving for shaky PIIGS sovereign
credit. They are selling loans to meet new primary capital ratios and are experiencing withdrawals
of jumbo deposits as MMFs pull money to avoid having to "break the buck" on fund asset values.
In short, the banks are relying more heavily on the ECB for liquidity and are poorly positioned
to provide incremental credit throughout the EU, eastern Europe and Asia. So a major source
of trade credit could well be sidelined in 2012, with no heirs apparent ready to step in quickly.

Experience tells me not to be far reaching in stressing the negative just yet. This is an integrated
global economy now and is coming off the worst global downturn since the early 1930s. The
abilities of finance ministers and central bankers were successfully tested in 2009, and the
new challenges ahead could still bring a positive, coordinated response, although it is not in
evidence yet. But, time is running short to review undoing some of the policy tightening put
in place over 2010 through the present.

There is one more tough issue ahead, and that is the oil price. It is very "sticky" given the
evolving economic environment, and what's more, a new round of monetary accomodation
could set off a speculative price run up which might  backfire on the global economy down
the road.
-----------------------------------------------------------------------------------------------------------
*** For partial global supply/ demand data and for trade, see here.