By Chris Berry (@cberry1)
For a PDF of this note, click here.
With few exceptions, deflationary forces are likely to challenge growth in much of the world in 2015. With the global economy more tightly integrated than ever before, the risk of much of the world catching a “disinflationary” or deflationary cold is pronounced. Most commodities are trading at or near five year lows, real interest rates negative in various countries, and Central Banks are having difficulty hitting their (admittedly low) inflation targets of 2%. It’s obvious to even the most casual observer that the inflation genie is not even close to being let out of the bottle.
Given that the global economy is generally struggling to generate “escape velocity” growth, the main question is how deflation might spread? I see three transmission mechanisms:
globalization, high debt to GDP ratios, and innovation in technology spurred by R&D.
This note discusses the first two mechanisms with a focus on China’s efforts to halt the “export” of deflation.
By Chris Berry (@cberry1)
To view this entire piece in a PDF, Click here.
“It’s tough to make predictions, especially about the future.”
- Yogi Berra
In the time that I have been writing on the metals markets and global economy, one mainstay has always been reading the tsunami of year end research reports laying out predictions for the year ahead. Almost universally, these well-written and tirelessly researched musings all share one consistent trait: they are almost always off the mark.
Last year at this time, I was reading about the looming interest rate increases in the United States (not even close), Japan finally conquering deflation and returning to growth (fourth recession since 2008), oil prices never falling below $100 per barrel (no comment necessary), the junior mining markets turning higher (I think we’re several years from this) and electric vehicles taking a much larger piece of automotive market share (not yet, but eventually).
I don’t mean to denigrate those who make predictions as it’s a necessary part of portfolio construction. The fact that so many predictions are so spectacularly wrong I think speaks to how interconnected markets are which makes it difficult to anticipate any sort of domino effect.
By Chris Berry (@cberry1)
For a PDF version of this note, click here.
Europe has always fascinated me. A thousand years of rich history confront you regardless of the country or city you visit. Opportunities to talk to Europeans from all walks of life about their views on current events or the global financial markets put in a unique historical context are worth the time and effort it takes to plan a trip.
My recent trip to Frankfurt, Munich, Zurich, and Geneva was no exception. I went as a keynote speaker on the Fourth Annual Zimtu Capital Bus Tour where I spoke in each city and served as a moderator and emcee. Accompanying Zimtu were a well-rounded stable of companies representing resources as varied as diamonds, potash, coal, and uranium. Representatives from the Canadian Securities Exchange along with several CSE-listed companies were also in attendance on the bus, and as these companies were not natural resource-focused (vertical farming, biotech, etc), it gave this year’s tour a more diverse flavor than in years past and everyone – from institutional and individual investors to the companies themselves – had a unique opportunity to view the small cap discovery sector in a different light.
That said, this note is really intended to focus on what European investors think of the resource sector now that we are three years into what feels like a seemingly relentless malaise.
Here is the link to Mike's most recent presentation to the FFIEC in Arlington, Virginia earlier this week. It is lengthy, but discusses numerous topics including the Inflation/Deflation debate, Commodities, Banks, Jobs, Currencies, Deficits, and Emerging Markets.
You can download a copy here.
Though many disinflationary forces still predominate around the globe, more and more is being said about food inflation. We still believe in the primacy of food security as forces as disparate as the weather and urbanization coalesce to push the price of food upwards.
Some recent headlines reinforce this assertion:
The Institute of Supply Management released its January 2014 survey yesterday.
- While the survey still indicated growth in the US Manufacturing sector (at a reading of 51.3), the consensus estimate called for a reading of 56.
- This was a substantial “miss” and equity markets collapsed with the Dow falling 326 points, or over 2%.
- The ISM reading, coupled with increased volatility in emerging markets such as Argentina and Turkey, have many thinking that the long awaited correction and rebalancing of growth in financial markets is upon us.
- Two questions remain – First, have the Emerging Markets entered a crisis phase or is slowing growth in the developed world a bigger issue? Second, Can the Fed continue to taper asset purchases in the wake of this volatility and possible economic weakness in the US?
Significance of the ISM
Regular readers of Morning Notes will know of my preference for ISM and PMI data as a gauge of industrial demand. If industrial demand is increasing and economic expansion is occurring, this is ultimately bullish for the base and energy metals complexes.
Since last summer, the ISM numbers in the developed world (the US and Europe) have ticked up and lent credence to the idea of a slow, possibly sustainable, economic recovery.