Overview of Recent Macro-economic Trends

Interesting Macro-Economic changes discernible from the last 20 days of market action:
1. Bond Yields of Italy exceed that of Spain. Indicative of a trend? Yes, I think so. The rising yields should be seen in the context of the large scale rollover/repayment of debt (variously estimated at US$2-4 trillion) in the next one year.
2. The Interesting similarity of with 2008 is that policy makers are putting forth essentially the same arguments about the health of the system as the US policy makers put forth just before Lehman - that goes for a lot of others including the CEOs of banks. Remember Lehman CEO himself claimed three days before the firm collapsed that they had sufficient capital. The problem with modern finance is that hoards of cash can move out with the click of a mouse. At least in the 1920s bank runs were more easily visible. People had to line up in front of a bank to withdraw their money and carry it out in bags.
2. Lots of talk about a bailout for the banks, through recapitalisation. this is likely in the G-20 Meeting at the end of this month or November 2-3. But the problem with bailouts, is that the proposed bailout fund largely consists of fiscally stressed countries guaranteeing the debt of other nations. The logic of wisdom that thinks such a programme can succeed is similar to the claims that we had about 2 years ago that if countries take up austerity programmes this would go a long way in solving the Eurozone problem in the next 2-3. Greece should give us the results.
3. Quantitative Easing of various hues seems to have started and is likely to become more pronounced in the next 2-3 months. This should create a mirage of recovery but the law of diminishing returns of more money pumping seems to have kicked in. This will have at best marginal impact.
4. The most interesting long-term development is that default is more taboo. One year back, the mention of the 'D' word (default not depression or deflation) caused much consternation amongst European policy makers. That now seems to be missing. This should considered great progress. My personal view is that if there has to be a lasting recovery, then at some point there have to be a massive defaults and write off of debts. Such a write off would not only reduce the total debt but would also reduce the speculative element in the global economy. Take for instance the total global GDP (which is less than US$60 trillion) while the notional value of derivatives is nearly US$605 trillion (most recent BIS estimate). Such levels of speculation led us to the crisis. I would speculate that the global economy will not witness any vibrant growth as the deleveraging from debt has a long way and this would be followed by a major fall in the asset prices (and with it the notional value of outstanding in the derivatives) over the next 5-7 years. That would indicate that the world's financial markets are likely to mimic the movement of Japanese markets over the past two decades: Sharp rallies while the overall trend will be largely down. Falling asset is likely to mean that deflation is likely to be the predominant focus of attention over the next 2-3 years, if not beyond that.
5. A detailed analysis of the price movements of various agricultural commodities seems to indicate that these commodities (especially rice, cotton and sugar) are likely to be the focus of speculative activity. Deflation or not people have to eat and with rising populations and problems that originate from the vagaries of nature are likely to be the major causes. The next round of stimulus will make commodities the first beneficiaries of easy money for the simple reason that almost all the agricultural commodities lack the depth to absorb large amounts of capital.