Vapid volumes courtesy of Algo traders surfing on central bank liquidity have driven most asset prices higher over the past two months. These price gains fly in the face of a weakening global economic outlook as forecasters slowly cut their previously optimistic projections for 2012 and 2013 global growth. Today Pimco lowered its global growth forecast for 2013 to 1.3 percent to 1.8 percent from about 2 percent pointing out that the private sector isn’t healthy enough to step in and extend credit amid deleveraging and that Central banks are gradually losing effectiveness in helping the real economy, while the low growth rate of corporate profits and the low rate of investment means a near stall speed of the global economy in the months ahead.
In advanced economies, yields on both investment grade and sub-investment grade corporate bonds have fallen to their lowest levels since before the 2008 financial crisis. The same is true of yields on emerging market bonds, whether issued by sovereigns or corporates, denominated in local or international currencies. Yields on bonds backed by mortgages and other collateral have fallen to their lowest levels ever. Meanwhile, equity markets mostly rose. Both asset classes have benefited from more loosening of monetary policies and a consensus perception that major near-term downside risks to the world economy have magically diminished. As one after another commentator throws caution to the wind, I can’t help but remember that time old adage that when all of the experts agree, something else is bound to happen. These charts courtesy of the Bank for International Settlements capture the price risk in current stock and bond prices.