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  • Christian Armbruester

When Pigs Fly

We had a bit of wobble in the US stock market last week and it is worthwhile putting that into perspective. First of all, this has been the first sign in a very long time that this market actually can go down. Lest we forget, we have been going up very steadily for almost 10 years now. We also have US midterm elections coming up and the Brexit negotiations are in their final hours (amazing what a deadline can achieve). Given that the outcome of these events is rather random and yet the effects so powerful, is it any wonder that many a folk have taken some profit here?

Now that the panic is over, let us put this into further context. Much of the spectacular rise in global markets has been driven by so-called “asset price inflation”. Because of low interest rates and the intervention of the central banks, a huge tsunami of money was created (more than $25 trillion at last count) to fill the biggest hole in the history of financial markets. Forget about the mechanics of how on earth they can print money on one end and buy their own debt on the other, and that the whole thing smells like a giant Ponzi scheme. Rather, just think about where that money had to go and look at the very rise in prices of all global assets from real estate, commodities, and of course the stock and bond markets as a result of these actions.

What we have learnt so far from the experiment known as “quantitative easing”, is that we can keep the patient on life support for a very long time. In other words, as long as we keep the market flooded with liquidity, we can sustain a state whereby everything is just a bit more expensive and balance sheets look good (apart from the very large debts). But of course, we haven’t solved the problem yet because, you know, we are still on life support. The hope is that with all this stimulus, the world economy will start to grow strongly again and we can just pay down the debt over time. The fear is that all of this will cause (consumer price) inflation, because that would mean we have to raise interest rates faster than what is good for the patient.

It is the reason why the US is now trying to raise interest rates before it all spirals out of control, but we are very much in uncharted territory as to the outcome of this experiment. What makes matters worse, is that the world isn’t acting in unison anymore. As it happens, different people have very different viewpoints, when it comes to deciding who gets to keep the inflated assets and who gets to pay for the damage. But this is the beauty of the markets, they don’t care about interests or opinions, and they don’t move in bubbles. One way or another, the many imbalances that we have created are going to have to adjust, correct and simply price-in where we are in the grand state of play. And if, like me, you don’t believe economists can predict the future and that pigs don’t fly, then this sell-off last week looks long overdue.


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