Yesterday, according to Bloomberg, the market capitalization of the world's equity markets reached a new post-recession high of $56.2 trillion. That's up 120% from the March 8, 2009 low, for a gain of over $30 trillion. Those brave enough to own equities over the past four years have seen their wealth increase by more than $30 trillion. 30 TRILLION dollars.
Four years ago, markets were priced to something akin to Armageddon. The world financial system was on the verge of collapse, and almost 60% of global equity market cap had gone up in smoke in just over a year. Credit spreads were priced to wholesale bankruptcies. The global economy was widely expected to be in a depression/deflation for years. Global trade had collapsed: U.S. exports had fallen 25% in the previous 8 months. U.S. vehicle sales had dropped by over 40%. Housing prices had plunged by a third.
Today, instead witnessing the ruin of the-world-as-we-knew-it, we fret that the U.S. economy is experiencing its weakest recovery ever, and that the Eurozone economy is still in a mild recession. Governments everywhere are struggling to impose austerity measures, and the focus of central banks is shifting to how they will exit Quantitative Easing, not whether they should do more. We've come a long way in just four years.
I think the thing really to be fretting about is whether the Fed will reduce its flows.
ReplyDeleteThe structure of the economy requires constant flows. Reforms in Europe remain limited as they will in the U.S. Bigness and cronyism is a constant.
Low interest rate and deficits are permanent as necessities under the current economic structure. There will be no Fed exit. They better not exit.
Fundamentals under stock prices are solid but the same could have been said of most stocks prior to the sub-prime crash. The problem with stocks is that they are so liquid. When people panic and need to get liquid, they sell stocks. When Lehman's accounts got locked up in bankruptcy, hundreds of million of capital were off limits and people and firms had to find liquidity elsewhere, so they sold stocks.
ReplyDeleteThat is the chief risk to holding stocks right now, the prospect of panic selling. It is also an opportunity.
focus of central banks is shifting to how they will exit Quantitative Easing, not whether they should do more--Scott Grannis.
ReplyDeleteNot sure about that. The Fed is looking at sinking inflation as we speak, now down to 1 percent, and falling. Commodities are dead, wages are dead, unit labor costs are falling, employment growth very weak.
Europe is dying.
I think the Fed may actually announce a boost in QE, to match that of Japan, where the BoJ is talking a good game (China already targets 4 percent inflation, so they do not have a problem).
That leaves Europe. If the ECB is contemplating anything but stimulus at this point, they are nuts.
The Bank of England is talking about targeting nominal GDP growth, and that will mean QE.
I think Grannis is wrong on this one.
The central banks are slowly coming to their senses. The demon anymore is not inflation. It is perma-rcession ala Japan.
Fed Open to Expanding QE as It Counters Talk of Tapering
ReplyDeleteBloomberg - 1 hour ago
Facing the risk of a fourth straight summertime slowdown, Federal Reserve officials raised the prospect of increasing the monthly pace of bond buying above $85 billion to guard against any slump in growth or employment.
Scott, link is to article I encountered on May 2, 2013, advocating that 'global networks' (including financial systems) must be redesigned:
ReplyDeletehttp://tinyurl.com/cq2hqsg
Gene: thanks, that helps explain why the 2008 financial crisis had such a huge impact on the global economy.
ReplyDelete