A Vicious Cycle

John Butler

A global economic slowdown is well underway. Central banks have responded with fresh rounds of stimulus, as anticipated by financial markets. But just as the economic recovery of 2009-2011 was largely artificial and thus disappointing, so the unfolding slowdown is going to result in a few nasty surprises. Butler discusses some of the more important implications of the current ‘vicious’ cycle, in which unseen damage is being done to the global economy. As the damage becomes apparent—perhaps soon—equity market valuations are going to take a hit.

Leading indicators the world over have been pointing toward slower growth ahead. It’s not just about the Eurozone any more. The US, China, India, Brazil, Japan—most economies appear to be slowing. Below-trend growth is here and looks set to continue into 2013. Business cycles being a fact of economic life, the current slowdown is not surprising. What is surprising is the lackluster upturn that preceded it.

First, in the developed economies, real GDP has yet to materially exceed the previous peak reached in 2007. For a downturn to begin without having exceeded a previous output peak is one way to distinguish a ‘depression’ from a ‘recession.’

Second, the mix of growth has also been poor; it has been driven less by real fixed investment and final demand than by stimulus-fueled inventory accumulation.

Butler discusses the sub-par recovery; why US homeowners’ equity has yet to recover from the crash; QE, currency and trade wars; and investing for the vicious cycle (be wary of stocks and bonds; seek out defensive commodities.

source: financialsense