Developing Euphoria

The consensus is expecting a better world economy later in the year in all regions. That is nothing new. The consensus started the year expecting “normalization” of the world economy during the course of this year. Normalization in the consensus sense meant improving economies, rising inflation and interest rates but also rising corporate profits.

However, so far the incoming data and the corporate sector reports are mostly falling short of expectations. And I seriously doubt we will see conventional developments into next year. In contrast, I worry much more what could go wrong, particularly after four years into a cyclical bull market in equities where aggregate corporate earnings are stagnating or even shrinking instead of expanding and there is widespread optimism in financial markets. While I have expressed some of my concerns here from a structural viewpoint before, my biggest worry over the next two years is the combination of an ever increasing credit bubble in China despite the end of the investment boom and a slower economy combined with the continued targeted yen devaluation and what it could mean for the world. To achieve 2% inflation, Japan will in my view have to devalue its currency 20% each year versus its major trading partners. Japan forcing her currency down will reduce other countries’ competitiveness. It would decrease returns on many investments of recent years in those countries to very low levels, making some even obsolete. Such a development would eventually spread worldwide and have quite deflationary consequences, resulting in recession and declining profit margins despite all the money printing going on...

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http://www.itau.com.br/itaubba-pt/analises-economicas/publicacoes/global-connections/developing-euphoria-felix-zulauf

Retailpropshop: Felix Zulauf, owner and president of the hedge-fund Zulauf Asset Management, is a prominent global macro analyst, and should always be listen carefully.