Global Economic Supply & Demand

Global industrial output measured yr/yr has declined from 4% in the early spring to 3%
recently. Growth may have slipped slightly going into year end. The reaction of the
commodities markets to this dissipation of demand growth has been spectacularly negative
in my view. Commodities prices are normally volatile, but I suspect the presence of  large
financial players has added substantially to volatility over the past ten years.

The outlook for global economic demand in 2015 is admittedly hazy. The world's four major
central banks -- The Fed, ECB and the central banks of China and Japan are not all on the
same page presently when it comes to liquidity growth. The US is unwinding a program of
very substantial liquidity expansion. Japan is only now beginning to see faster liquidity
growth after a year of central bank ease. China in substance is following a stop / go policy
which just recently veered toward 'go'. The ECB, where substantially faster liquidity growth
is advertised as just around the corner, is actually reporting a mild acceleration of monetary
liquidity expansion following an awful period of stop / go policy over the past five years.

When you use liquidity as a touchstone for future economic growth as I do, the current disparate
policies of the leading central banks makes for tough going when it comes to gaining a bit
of insight on the future. Presently global demand growth is still moderating and deflation
pressure remains on the rise. However, the reactions of key equity market sectors, currencies,
commodities and various segments of the bond market to the economic situation since the
spring of 2014 has been so powerful, that I wonder if much of this fallout is simply outsized
relative to what has transpired economically. After all, we are looking at a moderation of
global production growth from 4% to 3%, not the immediate onset of recession.

If global growth does accelerate later this year because of enough of a mix of private sector
credit flow to compliment more modest liquidity expansion, there could be powerful
reversals in overpriced markets like US Treasuries and The US dollar and deeply oversold
markets such as commodities and selected currencies such as the Japan Yen.

As a final note, the decline in commodities prices in general and sensitive materials prices
in particular has been strong enough to warrant watching out for the eventual mothballing of
of production capacity in some of the many markets that comprise these groupings.

Weekly CRB Commodities Chart + Industrial Commodities