Global Investment Strategy

GIS July 18 (The Key Indicator)

Date: 2016-07-17 - Prepared by: The GISI

The trade-weighted US$ is now the key leading indicator for stocks and the world economy. If the US$ continues to trade sideways, as it has since April 2016, stocks will appreciate by around 10% within the next several months. In this week’s GIS we explain why.

The recent collapse in long term bond yields means that the world economy will grow at around 3% and global CPI inflation will fall to roughly 1.5%. Ten years ago, the same 3% real growth produces a global CPI of 5% (hence, nominal GDP growth has essentially halved).

When commodity prices collapsed in mid-2014, all commodity producers drastically slashed investments. Governments of commodity importers should have raised investments to smooth the transition, but they didn’t. The result is the prolonged adjustment of the world economy.

Consumer spending in commodity importing economies will remain robust for the next 6-12 months, but unless corporate and/or government investments pick up, consumer spending will peter out and stocks will tumble.

Within the last 30 days Britain has managed to (a) hold a referendum, (b) replace the prime minister, (c) appoint a new cabinet and (d) make several concrete announcements on future monetary and fiscal policy. This demonstrates remarkable agility, flexibility, and dynamism.

Eurozone has become the weakest link in the world economy. The ECB is the only fully functional institution. All other government entities seem to be paralysed. We discuss market implications.

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