Peter's Perspective
25th July 2016 by Peter Churchouse

The Scariest Chart I’ve Seen This Year… And What Comes Next…

Take a look at the chart below.

It is deeply worrying.

It’s not complicated, but it tells you everything you need to know about where the global economy is at right now.

Chart of 3 Global Economic Cycle Indicators from 2004-2016, including International Trade Growth, Industrial Production growth, and Business confidence.

We’re looking here at three major global economic cycle indicators:

  1. International trade growth,
  2. Industrial production growth, and
  3. Business confidence.

Not surprisingly, they are all closely correlated.

During periods of global economic expansion, people trade more. Businesses are confident in the future and production is high.

And vice versa…

But why does this chart alarm me?

Let me break this chart into three distinct phases:

Phase 1: Pre-GFC
Everything’s ticking over nicely… trade and industrial production are growing at a mid to high single digit annual growth. Business confidence is high.

Phase 2: GFC and recovery
Not surprisingly, the global financial crisis and subsequent recession sees deep contraction in 2008 and 2009, followed by a ‘recovery’ surge. But then, we settle into…

Phase 3: The New Normal
By 2013, we should expect to see some trending back towards pre-GFC growth and confidence trends.

But we don’t. Far from it.

Instead, we see a short-lived bounce in 2014 back towards ‘normal’ ranges before things taper off such that now, in 2016… trade and industrial production are negligible, and business confidence is the same as 2008, as the global economy was sliding into recession.

Not only are these major indicators short of our pre-GFC levels… they are heading in the wrong direction.

It’s not a pretty picture.

Should we be concerned? Absolutely.

Do we need to panic? No.

As investors, we just need to adapt. And in order to do that, we need to think about the next phase… ‘Phase 4’.

If you want to know what ‘Phase 4’ will look like… and the risks and opportunities it will bring, then you need to start with one fundamental realization: monetary policy has failed.

Interest rates are at historic lows in the developed world. Some US$12 trillion of debt is negative yielding. Trillions of dollars have been printed… It’s not working. The chart above clearly shows us this…

But what does this mean?

The next logical step is for Central Bankers and policymakers will take increasingly radical measures to try and stimulate growth because zero and negative interest rates are not working.

I’m serious when I say that every investor should take some time to really understand what that means… forget about Brexit or political conventions for a couple days, and think about what it means when interest rates just don’t work anymore.

It’s worrying, exciting and challenging all at the same time… I hope not just to an economist and investment analyst like myself.

Good investing,

Peter Churchouse

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