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Macroscope | Once stock markets realise how bad the real economy is, things will get much worse
- The economy is set to get worse before it gets better, especially once markets fully realise the bad news – and starts dumping overinflated assets for cash and gold
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Slowly but surely, a realisation is taking hold in the liquidity-gorged stock markets that all is not well in the real world or “real economy”, though this has long been obvious to anyone with even a passing knowledge of economics and finance. This awakening promises to be a rude one.
It will result in the implosion of the valuation bubble for many stocks (tech especially) on Wall Street and elsewhere, and while these are paper values rather than cash holdings, their plunge will undermine company purchasing power, investment and the general “wealth effect”.
Following close behind will be a slide in production, trade, wages and consumption. All of this, unfortunately, is likely to be accompanied by “higher for longer” inflation and interest rates, and consequent debt distress. It’s not a pretty picture but it is drawn from real life.
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Writing in the Financial Times last week, Katie Martin suggested it may be time to retreat into cash, quoting a BlackRock executive as saying “the king is back” in reference to cash as an asset class. Although given the destructibility of cash by damage or inflation, gold may be a better bet.
With refreshing wisdom, Oanda analyst Kelvin Wong noted earlier this week: “The great divergence continues between the state of the real global economy and risk assets such as equities.” Several key stock markets, he observed, especially in the United States and Japan, are on a “bullish” footing and ignoring the global recession risk. For such confidence to be warranted, he added, higher US consumer confidence and more positive corporate earnings are needed.
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Markets have not quite got the message yet that their unthinking optimism is badly at odds with economic reality, but they are beginning to. The most telling and chilling of recent comments have come not from market analysts, however, but from official economic sources.
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