The G-16

The US, UK, Europe and Japan are all pumping up their Central bank balance sheets. As world leaders confab in Mexico, the top 4 developed economies are being supplanted by the bottom 16. Secretary Geithner turned up the heat on additional IMF support for Europe by demanding a bigger firewall. For now, Brazil and Russia are playing along. What is increasingly obvious is the BRICs and beyond are gaining the upper hand. (As we noted in an earlier note, this is sometimes called the Lucas Paradox)

The implications are serious with oil prices flashing red. The Fed has increased anti-LSAP rhetoric over the past few weeks as commodity plays have jumped. In a world of rapid trading theme consensus, monetary policy and fundamentals can be overrun by "the herd." Access to commodity markets has never been wider. Unlike the ability of Wall Street to produce new financial assets as demand grows, PM and oil are finite. Other basic commodities could easily see back month open interest cornered by just a moderate sized player. The regulators are scrambling to limit ownership with new laws.

Expect the inflation and stagflation ranters to turn up the volume. We are more inclined to view this as a popular trade than a 70's debacle. The story will change and the massive rentier flows will find a new darling faster than Kim Kardashian switches boyfriends. For now, power in the G-20 will invert with the flow of capital. The resource and capital countries will rise at the expense of the indebted and printing top 4. After a few months of improvement, global imbalances are shifting back toward stress.

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