Global Economic Supply & Demand

Despite moderate global economic recovery over 2009 - mid-2014, excess production capacity
remains a worldwide problem. Following a period of intermittent inventory restocking during the
during this period, the capacity excesses resurfaced with a vengeance as global production and
trade slowed over the past nearly two years. Emerging market production began to improve
in early 2016, and the rest of the world has gradually followed suit, signaling a return from very
slow growth and deflationary pressure to prospective moderate growth.

Historically, bouts of inflation start in the commodities sector. Over the past year, a broad measure
of industrial commodities has jumped by over 27%, paced by a partial recovery in fuels prices. The
even broader CRB commodities market has recovered by nearly 15% over the past 12 months.
$CRB Weekly

The commodities markets have seen capacity reductions in various sectors since 2014, but excess
remains. My long term macro model for the CRB composite has breakeven in a range of 300-
335, with the low end of the range reflecting the positive impact of lower oil and fuel prices on
the cost structures of non-fuels commodities production.

Even so, with stronger global industrial output growth underway, commodities prices can
recover further, and should global production rise from the low of 1% seen in early 2016,
back toward more nearly respectable 2.5% during this year, the CRB can rise substantially more
and put added pressure on a rising inflation rate. That would strongly suggest more upward
pressure on interest rates and downward pressure on the p/e ratio of the stock market.