Summary

The dollar remains the primary source of global liquidity and the pool is shrinking at an unprecedented rate. Patrick believes the global economy could experience a dramatic slowing in activity and inflation will follow suit. Furthermore, economic difficulties could exacerbate current geopolitical tensions which, much further out, could prove to be inflationary. However, before then the world could see a significant shift in asset valuations. Against this background many global bond markets are back at attractive levels with real yields in the US around 1.5 percent across the curve. Breakeven rates are around 2.5 percent. Both are likely to be materially lower before the year is out. CPI is being distorted by the lag in shelter. In the coming months, expect to see downside surprises. The labour market is softer than the picture painted by the January employment data. Housing will remain in recession and residential construction employment is nearing a Wiley-E Coyote moment. Consumption - US retail sales have stagnated. Delinquencies are rising and credit is tightening. Corporate Credit – Record debt, surging bankruptcies, tighter standards & refinancing. A global freight & trade recession. China – Excessive Optimism.

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