Rising GDP means higher inflation and interest rates

Below is an extract from this week’s IMF economic forecast report showing World GDP is set to rise 21% over the next 5 years.

This is an average of 4.2%, which is a good 35% higher than the post GFC GDP growth average from 2013-17.

So, how can the world’s economy grow by one-fifth in short period of time, without any material inflationary pressures when companies are telling us they see rising costs, constraint in capacity and the need to increase selling prices?

We will see a huge amount demand for production output constrained by production supply.

3 into 1, just won’t fit.

I think central banks in the ‘developed world’ are behind the curve.

Russia, Mexico, Brazil are commodity producing and commodity sensitive economies. Their central banks have been raising rates citing reasons to curb the rising cost of living.

Inflation is a tax that the ‘poor’ can’t afford to pay.

Their citizens are amongst the least indebted in terms of personal debt to GDP, so rising interest rates doesn’t threaten the value of their real estate and financial asset values unlike the sky-high indebted citizens of Australia, Canada, the U.S. and the U.K.

(see the other image below)

Interestingly, South Korea, Norway and New Zealand are the first of the developed world economies to raise interest rates. Their central bank reasons were to curb their respective country’s soaring household debt and home prices. Not the cost of living……

October 13, 2021

by Rob Zdravevski

rob@karriasset.com.au

#economy #interestrates #growth #realestate

Health Check – the Copper/Gold Ratio

The watching the direction (not necessarily its value) of the Copper/Gold Ratio helps me reading the health of the economy.

And it has been healthy….

It’s particularly correlated with the direction of the U.S. Government 10 Year Bond Yield. More on that in the next post.

The chart below shows us the 6 moments when the Copper/Gold Ratio has registered an Overbought reading over the past 20 years.

Such occurrences correlate to and increase the probability of lower prices in the S&P 500 Index or at the very least see it trade sideways for the coming months. This also coincides with my thesis in my recent newsletter.

https://mailchi.mp/karriasset/quadrupling-yields-increases-equities-risk-2

What this chart tells you is that probability does not suggest ‘going long’ or making any meaningful capital deployment into equities at this juncture.

May 2, 2021

by Rob Zdravevski

rob@karriasset.com.au

%d bloggers like this: