In the past few weeks, a puzzle has developed in the global financial markets. Equities, at least in the developed countries, have broken free of the constraints which normally bind them to fluctuations in the global economy. To misquote the old Heineken advert on British television, the central banks have refreshed the parts which other factors cannot reach. Inflection points in QE are all that seem to matter and there is barely an equity bear left in the investor community.
Of course, there are always a few exceptions which prove the rule. Albert Edwards, the markets’ favourite bear at Société Générale, wrote last week:
The intoxicating potency of QE has drugged investors into believing they must participate in this liquidity fuelled frenzy. I repeat my thoughts of 2007… this liquidity argument is merely “lies, rhubarb, poppycock, bilge and utter nonsense”…The unfolding recession accompanied by full-blown deflation will result in a loss of investor confidence so that central banks are unable to prevent a Japanese-style deflationary event. The equity market will riot, Japan-style.
Who knows, Albert’s bearishness may be justified in the very long run. But for now the bulls are in the ascendancy. The reach for yield is extending into the equity market, and it will probably continue to do so unless the latest mini downcycle in global activity develops into something more serious. Read more