- The big picture on the world economy is that there is decent economic growth, very low inflation and low interest rates.
- One could ask: Well if growth is so good, why are commodity prices so weak and why did markets tank at the end of August? While we don’t know the answers, we surmise that before the decline commodity prices reflected some form of exaggeration, some fear that we were going to run out of oil, of beef, of grain, of copper, of rare earths etc. Well, these erstwhile shortages now appear to be gluts. As is normal demand brings forth investment and we now have more supply.
- With regard to the markets, sentiment was shaken by a combination of factors, news of a slowing Chinese economy, the apparent failure of the Chinese to steer the economy or markets, the sudden devaluation of the Chinese currency and what we believe were genuinely overstretched prices for Chinese stocks to which was added the fear of the negative effects of speculation around a possible imminent US rate hike (people remember what happened when the FED announced the end of quantitative easing in June 2013) which caused Larry Summers (ex-Secretary of the Treasury) to weigh in and remind Janet Yellen and the other Fed governors what the negative effects of a rate hike could be in this uncertain environment.
Bottom line is that we believe that the world economy is growing at a fair rate, that unemployment is coming down (albeit slowly), that the financial sector is substantially stronger than it was and that low commodities prices are helping keep inflation and interest rates low as we head towards better times. Our only worry is that the pace is slow and that we expect disappointments along the way. Growth is fragile and could turn negative with just a slight shock. Monetary easing is still on, just shy of full blast. Central banks have kept interest rates low, Europe is still implementing quantitative easing and Japan is still stimulating the economy. Only in the US have they stopped QE. We expect the reversal of quantitative easing will be very slow. Should the US for example just wait for the bonds to mature it would only reduce the FED balance sheet by around 6% per year (around 30% of the FED’s balance sheet is held in securities that have a maturity of less than 5years)…
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