UnwindingThe Great Unwinding of policymakers’ failed stimulus programmes is now clearly underway in the global economy.  The headlines this week all focused on the latest International Monetary Fund (IMF) report:

IMF says economic growth may never return to pre-crisis levels.”

And then, in response, the US Federal Reserve suddenly realised that the US economy was not as strong as it had hoped.  As the Wall Street Journal headlined yesterday:

Federal Reserve officials have become more concerned that weak overseas growth and a strengthening U.S. dollar will crimp the domestic economy and hold down inflation, an outlook that has made them more inclined to stick to low interest rates.”

This confirms the blog’s suggestion back in August, when it highlighted the start of the Great Unwinding:

Recent speeches by the new Fed Chairman, Janet Yellen, have been equivocal at best, suggesting she is not clear about the best policy to adopt.  There is also the fact that to some extent, events are moving out of central bank control”

Market action in the US Dow Jones Industrials Index confirms the volatility that is now developing:

  • The Dow fell 1.4% on 1 October, before jumping 1.2% last Friday
  •  It then fell 1.6% on Tuesday this week, before jumping 1.6% on Wednesday
  • Yesterday it fell 2%, leaving it down 3.6% since its peak at the time of the Alibaba float last month

Meanwhile Brent oil has fallen $24/bbl since its late June peak.  And no, that isn’t a typo.  Brent traded at $114/bbl between June 19 – June 23, and closed last night at $90/bbl.  The US$ has been equally volatile:

  • Against the Japanese yen it has risen from $1 : ¥101 in early August, to $1: ¥108 last night
  • Against the euro it has risen from $1 : €0.71 in early May, to $1 :€0.79 last night

These are enormous moves in such as short space of time, and will be extremely destabilising for the global economy.  Very soon, no doubt, the IMF will have to revise down its estimate for global growth for a 4th time this year.

THE OUTLOOK REMAINS VERY SCARY
The reason for this drama goes back to the legacy of the failed stimulus policies seen since 2008.  They created a tidal wave of liquidity which destroyed the ability of markets to undertake their key role of price discovery:

  • Markets completely lost touch with the reality of supply/demand as a result of this liquidity
  • But now, supply and demand balances are starting to matter greatly as the stimulus policies come to an end.

The blog developed its original analysis of the Great Unwinding in 5 posts during August – September.  Very clearly the risks that it then identified are now coming true.

In response to many requests, it has now combined these posts into a special Research Note.  Please click here to download a copy.  And do please feel free to circulate it to your colleagues and business partners for discussion.

Next week, the blog will also launch ‘The pH Report’.  It aims to help companies and investors survive the Great Unwinding of central bank and government stimulus now underway.