The Mining Report: You have talked in the past about the epic macroeconomic battle being waged between inflation and deflation. What are the indicators you are watching and where are we headed?
Chris Berry: Right now, the scales still appear to be tipped toward deflation, but that’s not uniform across the globe. It still appears that disinflation is the predominant force: There is evidence of economic growth, but productivity is stagnating and living standards are moderating as we haven’t seen the “escape velocity” growth necessary to start a new economic cycle. The excess supply in many commodities like iron ore is referred to as “good” deflation. However, savings rates are up and consumer demand is lagging. This is “bad” deflation. According to economist Gary Shilling, both of these are happening today. It appears that economic liftoff has been postponed. The secular stagnation thesis put forth by Larry Summers looks increasingly valid.
Disinflation is one of the reasons commodities, metals in particular, have been under pressure for the last couple of years. Globally, central banks have embarked on unprecedented measures, including quantitative easing (QE), to kick start their economies. The QE program in the U.S. has ended, but the results are mixed. Unemployment has fallen precipitously, but concerns over wage gains and the “types” of jobs created linger. The Federal Reserve, in particular Chairwoman Janet Yellen, seems intent on a Fed Funds rate increase, but precisely when is a moving target. Given the recent softness in economic data in the U.S., a rate hike could be pushed to the end of the year as opposed to June, which is when many were thinking it would happen.
The Eurozone has embarked …read more