Party On

I really don’t have a life, so for the last few days I have been reading and listening to what government elites and industry titans have been saying at the World Economic Forum in Davos.  You can’t help but feel that most of these participants are almost giddy about the current state of the world.  Global growth is healthy and synchronized and probably most important to these attendees, the markets are soaring around the world.  And with the implementation of US tax changes expected to spur business investment over the near future, many pundits see stocks only going higher regardless of their starting point.

Through headlines, we were reminded by Mr. Dalio of Bridgewater and Mr. Fink of Blackrock that despite the tripling of the S&P since the depths of the great recession, there continues to be ridiculous amounts of liquidity on the sidelines that could potentially be deployed into markets.  Fink told Bloomberg News that in some countries in Europe, around 70% of people’s savings was still held in their banking accounts.  Imagine, he said, if that moved into his business sphere (stocks and bonds) and imagine what that would do to help reduce inequality as these people benefited from rising markets.  (I will give you a moment to gag).  Mr. Dalio suggested that there was a risk we could see a “melt-up” in markets as cash moved in from the sidelines.  He feared that institutions and people left holding cash would feel stupid.  

The only real risks mentioned that could derail these extremely bullish forecasts seemed to be an unanticipated acceleration of inflation or a mistake made by central banks as they try to re-calibrate monetary policy to stronger real growth in highly levered economies.  If rates rise too quickly, all bets are off.

Would one dare suggest that the policy makers may have already made their mistakes?  That the reason for the near euphoria around markets evident at this gathering is because of the sugar rush provided by policy makers when they earlier added three sugar cubes instead of the one that was needed?  A global economy at or near full employment with American fiscal policy soon to kick in does not seem like appropriate, well-timed policy.  A world awash in cash that might yet be put to work in already overvalued equity markets does not seem to be well calibrated global monetary policy.  But these “mistakes” have resulted in an overabundance of “positives”.  What’s there not to like?

It’s the next mistakes that will now have to hurt even more.