Stagflation

As we reach the end of 2007 it now is abundantly clear in the markets and finally the mainstream media that things are not well at all in the US and I would argue by extension, the World's economy. The market is apprehensive and fearful of the future. Debt markets have seized up, prompting massive central bank interventions which will inevitably prove inflationary.

In the US, as growth slows, inflation rises, prompting justified concerns that the US is moving into an inflationary cycle. Equity markets which has traded sideways in 2007 will likely connect with debt markets and trade downwards in real terms in 2008. Governments and their agencies seem reluctant to purge the excesses of the monetary expension that has accelerated over the last fivs years, despite the fact that this is the cathartic medicine that markets truly need.

At this point it seems inevitable that 2008 will seen the 'R' word beginning to be used more frequently, particularly in relation to the US economy. By the end of 2008 we will most likely see the consequences of the US slowdown flowing into the world economy with Asia and Europe following.

The article linked above refers to the European central banks injection of EU350b into the capital markets. However, risk aversion remains high. Eventually if banks remain reluctant to lend, asset prices will come under increasing valuation pressure, and by a natural extension equity prices.

While 2007 may still pass as a Merry Christmas, 2008 may not be so cheery.

But for now a Merry Christmas and a Happy New year to all.