“….In his weekly ‘Sunday Start’ letter, Morgan Stanley‘s Joachim Fels presents the other side of the commodity collapse, and a reason to be optimistic:
Somehow the proverbial American optimism must have affected me also when it comes to the cyclical outlook. What I’ve been telling investors on my trip is that despite the soft patch in the US economic data, the wobbly recovery in China and what looks like a deepening recession in the euro area following this past week’s PMI, Ifo and INSEE business surveys, my confidence in our ‘twilight to daylight’ saga of a second-half global rebound is actually even stronger now. Why? One reason is the much-discussed drop in commodity prices. My sense is that this is not just a reflection of recently weaker global growth data. I rather suspect it is also due to the supply response in many commodity markets that has been elicited by years and years of elevated prices, and to a growing realization by investors that global money-printing does not necessarily lead to high inflation, which has probably reduced the demand for commodities such as gold and oil as inflation hedges. In any case, lower commodity prices lead to what I call ‘good disinflation’ as consumers’ real disposable incomes benefit from lower energy and food prices. Hence, I expect the global soft patch to give way to a consumer-led re-acceleration in the next couple of months.
The second half of the explanation, that there’s been a sea-change in thinking among investors about the relationship between “money printing” and high inflation is an important one….”
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