Wednesday, October 15, 2014

The Global Economy Six Years After Financial Crisis

This article looks at several markets which indicate how investors are looking at the global economy.  It has been six years since the financial collapse in 2008 and one might have expected the global economy to be in better shape than we find it.

Prices ordinarily rise during a recovery as employment and wage growth leads to an increase in demand.  That has not happened.  Investors are willing to purchase ten year US treasuries that yield only 2.2%.  They are only willing to pay a 1.5% premium for five year treasuries that protect them against the risk of inflation.  In other words, investors are not worried about price inflation.  That means that they still see risk in the global economy.

Prices for several commodities have also been falling.  To some extent that is caused by increases in supply, but it also indicates that demand for many commodities is not increasing.

The US dollar has also increased in value relative to other currencies.  A lot of factors determine the relative value of the dollar but safety is one of them.  The value of the dollar has been driven upwards to some extent because it is regarded as a safe haven in global economy that has several soft spots.

The stock market has appreciated in many regions over the last few years.  That leads many to believe that the economy is in good shape.  Stock prices have risen because corporate profits have been strong during the recovery but they have also increased because the yields on bonds have been very low.  The recent downturn in the stock market may reflect investor concerns about profit growth in a weaker global economy and also a concern about the ability central banks and governments to arrest the decline in prices.  Price deflation is a greater concern than the fear of inflation.

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