In his 2013 book The Age of Oversupply, Westwood Capital's Dan Alpert argued the global economy is suffering an oversupply of labor, capital and productive capacity relative to demand. He called it a "reverse supply shock." The book featured a number of solutions to the issue -- namely more government spending on infrastructure. But the problem Alpert identified -- the specter of deflation -- has raised its ugly head and given financial markets a jolt this month.
"The problem is that when you have this global deflationary pressure that is bearing down on the advanced nations that’s even affecting the emerging nations, that’s a big problem," Alpert says. "And the big problem is that eventually prices are going to start to fall. Prices for goods and services."
Related: Why deflation is so scary
The deflation problem in the U.S. was masked by what Alpert calls a "bubble-ette" in housing prices. "Well, that's run its course," he says. "So you’re going to see the CPI data [Tuesday] is going to be yet another month of weakness because housing is no longer driving the boat."
Consensus is for an unchanged reading on headline CPI for September after a 0.2% decline in August. In our weekly roundtable on Friday, Alpert says the core CPI reading is most important and again pointed to the loss of boost CPI was getting from housing, namely the owner-occupied rents component. "Now the question is: We've leveled the wings of the plane, is it really flying or are we actually going to fall into the same disinflationary or deflationary trap as Europe?"
These deflationary forces, which Alpert says are starting to appear in China and reasserting themselves in Japan, explain why the much-heralded recovery in corporate capital spending remains subdued.
"There is no demand for new capacity, new plants and equipment in the advanced nations," he says. "Obviously China continues to grow... other areas continue to grow but there is no reason when you have this vast offshore labor pool to exploit to build a plant here" in the U.S.
In sum, Alpert says: "We have a deflation problem in certain places and we have an insufficient inflation problem in other places," which suggests St. Louis Fed President Bullard might have been onto something when he said last week the Fed might not want to abandon quantitative easing just yet -- and might even have another round of QE up its sleeve.
And while that's good short-term news for the market, it suggests the long-term problems that have dogged the global economy aren't any closer to being resolved. There's a reason why the subtitle of Alpert's book is: 'Overcoming the Greatest Challenge to the Global Economy'.