Global Economy Faces Harsh Headwinds

This column was originally published on Street Insight on June 11 at 7:59 a.m. EDT. It's being republished as a bonus for TheStreet.com and RealMoney.com readers.

It's shaping up to be a perfect storm for the global economy.

The salutary impact of an increasingly levered hedge fund industry, globalization, financial innovation, recycling of financial flows, lower taxes, free trade and loose monetary policy -- which Pimco's Bill Gross recently described as leading to a "stable disequilibrium" and others have termed leading to Goldilocks -- appears to be waning.

At the same time that these factors are changing, it is particularly worrisome that risk spreads are at near historic lows, global equity markets seem priced nearly for perfection, the world's investor base has never been more leveraged with margin debt and carry trades, and the U.S. consumer has never had so much debt, nor has he been so dependent on cheap money and the appreciation of stocks and homes.

Today, a synchronized worldwide economic expansion is morphing into a simultaneous tightening by the world's major central banks. The world's debt markets are making lows in price and highs in yields (e.g., the yield on the 10-year U.S. note increased by 20 basis points last week and by 50 basis points over the last four to five weeks).

The implications will be felt in the economies and equity markets around the world. Slowing earnings growth, climbing interest rates and lower profit margins will be the outgrowth of the aforementioned tightening monetary policy. In the U.S., the Fed's hands will be tied, as it will be next to impossible to ease anytime in the near future, or else the U.S. dollar would suffer materially.