A focus on the four "D's" - Debt, Deleveraging, Disinflation and Demographics and the very important "V" - Value
The world has been leveraging for most of the last 50 years, in both the private and public sectors, and now needs to ride the bumpy path of deleveraging without causing significant economic distress.
The 'Global Financial Crisis' was the consequence of an unsustainable debt peak being reached in the private sector. Since then, modest reductions in private sector debt have been more than made up by increases in public sector debt.
Disinflation is a natural consequence of deleveraging but outright deflation, globally, remains unlikely. In the Developed World services inflation dominates and this is particularly resilient.
Financial markets underestimate the powerful impact of adverse demographic factors over the next 50 years. When combined with disappointing productivity growth the outlook remains subdued, at best.
Government bond markets are priced for deflation/recession. Equity markets are priced for sustained strong growth. This disconnects needs to be resolved. Central bank interference in the market mechanism needs to end.
The Australian dollar has been overvalued for some years. This situation has recently improved but further adjustment can be expected.
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