16 Dec 2015

The Put and the Pendulum: Factors Affecting the Global Economy in 2016

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by Robert F. Baur, Ph.D. , Executive Director, Chief Global Economist

Highlights

  • China and emerging markets: China’s economic engagement with important emerging markets has begun to falter
  • Surging commodity prices: surging commodities prices have lost momentum due to the faltering investment boom in China and an increased supply of commodities
  • Non-U.S. labor-pricing power: the pendulum is now swinging away from low-cost labor providers like China
  • The U.S. Credit super-cycle: following the financial crisis, there is a movement away from U.S. fast-spending, credit-driven growth, and home-equity borrowing
  • Equities likely have more upside than bonds in 2016. However, the best returns may be in real estate

There is a famous pendulum in Portland, Oregon named Principia (no relation to The Principal) that provides valuable insight as we look toward what 2016 holds for the global economy. Principia is a special type of pendulum, called a Foucault pendulum, which is named after the original device’s inventor, French physicist Léon Foucault. Over the course of 18 hours, the arc of Principia’s swinging globe makes its way completely around the circumference of its crown, as it proves the rotation of the Earth. It also shows the slight error people make when using the pendulum metaphor. Most will say, “The pendulum is swinging back…” implying a fluctuation between two predetermined states. However, after Principia swings away from its maximum angle, it will not wind up exactly where it was.

Newtonian physics and economics are vastly different in their predictive abilities. Indeed, physics has the advantage of being accurate; the forces that drive the pendulum are defined and predictable. Yet, the forces driving economic “pendulums” are indefinite, vastly harder to predict. Think of Principia as we examine the forces impacting the 2016 global economy. One can’t know the end point to which those forces will take us, but we may know the direction!

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