Artificially low interest rates born of government stimulus have juiced prices across all risk assets the past 8 months. From housing, to stocks, to commodities to high yield debt few sectors have been left behind. Growing distrust of paper currencies which are increasingly levered has spurred bubbling speculation in gold and precious metals. As the US carry trade builds, those borrowing U$ at near zero rates sell the U$ loan proceeds and buy all manner of everything else. So far this widespread speculation has become the self-fulfilling and relentless cycle of US dollar down, other currencies and risk assets up.
These are not the days of wine and roses that soaring markets might suggest. Posing as an economic recovery, global speculation has now driven capital markets once again to a dangerous precipice: what if their galloping appreciation fails to translate into a lasting economic recovery? An excellent article in The UK Independent yesterday offers insight:
“Sometimes, however, economies end up in a different place, based on the physics of bungee jumping. The economy falls off a cliff. Activity drops a long way. Then there's a rebound. For a while, the rebound looks very good and it's easy enough for economists to stick to their straight-line thinking. But the economy never returns to normal; instead it is left dangling by a thread. The straight line simply doesn't apply…
In a world of bungee economics, it's just as likely that the current hopes of a “Great Recovery” will prove overly-optimistic. Rising asset prices may say something about the success of unconventional policies, but they could just as easily be part of the regular volatility of financial markets and, in fact, say hardly anything about longer-term growth prospects.
Throughout the 1990s, economists following Japan had to cope with similar problems. Every so often, the economic data would show modest signs of improvement. In their haste to declare recovery, investors would pile into Japanese equities, triggering a stock-market rally. The rally gave economists the confidence to revise up their forecasts for future economic growth. These upward revisions led to an even bigger rally. Then came the shocking discovery. The Japanese economy wasn't really recovering at all: it was the ultimate bungee economy, with occasional signs of rebound followed, as night follows day, by yet another setback. The mistake was to assume that financial markets provided an accurate forecast of future economic developments. As it turned out, the best they could do was to offer an occasional bout of wishful thinking…”
Good stuff, I think the bungee economy is a perfect analogy right now. Read the whole piece by Stephen King here :
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