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What I Care About This Week | 2022 Apr 18

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by Franklin J. Parker, CFA

The Summary

The Details

If one were to listen to the rhetoric, the whole project of globalization appears to reversing. Politicians have caught on that globalization has not been good for everyone, and there are blocs of voters who will support a reversal of open and free trade. Covid-induced supply chain struggles have also made a business case for the reshoring of supply chains.

Despite the headlines, so far the data appears to show the opposite. Total global trade, after taking a significant dip in 2020, has recovered strongly and begun to stretch to new highs, highs that are well above the last decade’s trend.

Generally speaking, strong international trade tends to follow global GDP growth, so all else equal this is a positive economic signal. The broader question is whether this recovery and new higher trend is sustainable in the current political and economic climate. Investors can keep an eye on this figure as a clue to the health of global economic growth, as well as how the whole globalization project is progressing (or not).

Chart of the Week

Everything about this economic cycle has been accelerated. The Covid-induced recession was over very quickly, and the subsequent market recovery has been among the fastest in recent memory. In that vein, many signals are beginning to indicate that another recession may be on the horizon (though not imminent). One of the earliest indicators we get of recessions is a closing of the GDP output gap, which is the difference between the theoretical output of the economy and the actual output of the economy. Though not yet closed, the GDP output gap has narrowed—indicating that the economy may be overheating and will need to correct.

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