To contextualize world economies, I’ve incorporated a well know Growth, Inflation Policy Model that is designed to separate each economy into four distinct regimes that correspond to the marginal rates of change of growth and inflation, which are two of the three principal components of asset class returns.
The third-monetary policy- is accounted for in this analysis by overlaying how central bankers are likely to respond to the implied changes in economic conditions. Here’s an example of policy divergence between two central banks.
The two factors to be most consequential for forecasting future financial market returns: economic growth and inflation. I track both on a year-over-year rate of change basis to better understand the big picture then ask the fundamental question: Is growth and inflation heating up or cooling down?
- Growth accelerating, Inflation slowing (QUAD 1);
- Growth accelerating, Inflation accelerating (QUAD 2);
- Growth slowing, Inflation accelerating (QUAD 3);
- Growth slowing, Inflation slowing (QUAD 4)
To be continued…
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