The recent global market slide sparked by fears of a looming credit crunch might very well be the first stages of the so called great unwind. Investors were taken by surprise, especially those that were under the impression of being hedged against this very type of loss. It just comes to show that complex derivative strategies don't always perform as expected.
There are signs that we may be entering a protracted slowdown phase for the global economy. We all recognize the beneficial effects of globalization on growth, especially in terms of its disinflationary impact. If we take the recent past as an example, another beneficial effect seems to be longer lasting economic cycles. What use to be 7 to 8 years of expansion before a recession now seems to last in the range of 9 to 10 years. Greater coordination between central banks and a more prudent approach to monetary policy clearly play a role in this.
But there are signs that the party is coming to a close. As yields worldwide continue to rise, the housing woes will continue to deteriorate. Since consumers perceive housing in a similar manner to stocks, this will invariably have a negative impact on the wealth effect in addition to the effect of higher food and energy prices. Eventually, the yield curve may reinvert. That in itself is not enough to suggest a looming recession. For that to happen, we also need to add rapidly deteriorating credit spreads (something that seems to be occurring at the moment).
