Global Economic Supply / Demand

Global economic demand growth hit an interim peak of just under 4% yr/yr over Half 1 '14. Since
then there has been steady but gradual deceleration of growth momentum of production to just a
touch under 2% in early 2016. With continuing substantial production overcapacity, global
inflation pressure has steadily subsided to a nominal level. There has been a recent, mild bounce
in pricing, as the painful process of mothballing excess capacity is underway. Among nations, net
producers of commodities have been particularly hard hit. Commodity Price Index

The broad CRB index recently hit a multi year low under 160, breaking long term support in the
180 - 200 area. The macro model I long ago developed to determine fair value (cover cost + earn
sufficient profit to warrant reinvestment of earnings) has the CRB as fairly valued in 2016 at the
330 level. With the commodities market so depressed, a pick up of growth in final demand  will
trigger off a round of inventory restocking that would send the commodities market sharply higher
in aggregate price. Barring a sharp rebound in demand, a number of commodities producers will
continue the difficult process of shutting down production facilities via merger or individual
actions. The recent upturn in the CRB largely reflects trader reaction to forthcoming production
constraints.

The US has bucked the trend of very slow global growth recently as commercial and industrial
new orders flows have gained in pace from low levels seen back in late autumn, 2015. But even
here, progress has been modest.

This is the seventh year of global economic expansion since the deep worldwide recession ended
in 2009. It has been a mild expansion, with global production about 30% above the level of a
decade ago. Expansive monetary policy by the world's major central banks has kept the globe
out of economic depression and the wolf of deflation away from the door. Policy has fattened
up asset values and lead to increased lending, but real output growth has disappointed given the
powerful liquidity flows we have seen. There is a broad range of fiscal stimulus and development
programs yet to be tried, but little appetite by governments to open up these options. Thus, for
now we are left with a world very much more reliant on its own internal private sector potential.