Bi-Weekly Geopolitical Report – Excess Capacity and Policy Change (June 8, 2026)
by Patrick Fearon-Hernandez, CFA | PDF
A key challenge of the big-picture, top-down investment analysis that we do at Confluence is tracing the real-world impact of a country’s economic policy initiatives. Whether policymakers are trying to boost economic growth, bring down price inflation, or achieve another goal, our aim is to figure out if the reform will be successful and the unintended consequences, be they positive or negative. Our ultimate objective, of course, is to determine the implications for financial markets and investment strategy.
One thing we’ve noticed is that many strategists attempting top-down analysis make overly simplistic assumptions about the likely effect of specific policy changes. They often ignore the fact that the same policy can be wildly successful or unsuccessful, depending on the pre-existing economic structure or conditions in place at the time. In this report, we show that one vital issue is the level of excess capacity in an economy. Many vaunted reforms in history were successful only because they were implemented when the economy had plenty of excess capacity to accommodate them. Many then conclude that those reforms would always be successful no matter what. We caution here that a deeper analysis is required to really understand any reform’s success and its financial market implications.