With the rough start to 2016 most investors are feeling a bit deflated. Not only are most asset classes in the red but now there is even talk about the dreaded D word – Deflation.
In this report we look at deflationary conditions around the globe and the likelihood that such forces persist over the foreseeable future.
We share our thoughts on the issue of negative short-term interest rates and the ability of monetary policy to spur growth to levels more consistent with the potential productive capacity of the global economy.
Finally we assess the implications for key asset classes in the face of changing inflation expectations.
Some of our report conclusions:
- The specter of deflation is already present in countries such as Greece and Switzerland and is not far off in a large number of other economies particularly those in Continental Europe
- Over the last ten years no country in our sample has experienced a negative annualized inflation rate but Switzerland (0.25%) and Japan (0.31%) have come close
- When using the Output-Gap to measure the divergence between current and potential levels of production, global growth has been disappointing for seven straight years
- Despite massive monetary stimulus, the negative global Output-Gap of the last seven years highlights that impediments to global growth are likely to be structural in nature
- Using negative policy rates are unlikely to sufficiently boost global growth and most likely will bring about an increase in investor uncertainty
- Equity oriented asset classes would dis-proportionally benefit from an increase in inflationary expectations while high quality bonds would suffer
- According to our macro risk factor model, the primary beneficiary of rising inflationary expectations would be at the moment Emerging Market Equities
Click here to download the report: “Being Back That Old Inflation Please”
Eric J. Weigel
Managing Partner and Founder of Global Focus Capital LLC