The best view is always from the top of the mountain. At least that is how it feels today, with this month’s IeC Boom/Gloom Index (blue column) hitting a record high. Nor it is alone, as the S&P500 (red line), the world’s most important financial market index is also at record levels.
Central banks broke out the champagne some months ago, as they saw clear signs that their policy of boosting financial assets was taking prices to new highs. Since then, they have never stopped talking about the expected economic recovery that will now inevitably follow, and markets have followed by moving into melt-up mode:
- Their policy is based on a belief that lack of liquidity has caused today’s problems
- They argue that the 2008 Crisis broke some of the key plumbing in the financial system
- It needed a power-hose filled with $33tn of liquidity to flush through it, and unblock the problem areas
They may be right, of course. Investors certainly believe the story, whilst the IeC Index is higher today than before the 2008 crash – showing sentiment is overwhelmingly positive.
But what about in the real world? Is demand really about to improve?
PIMCO, the world’s largest bond fund with $2tn of investments see danger ahead. Their latest newsletter describes their view of the “perilous future potential of market movements” as they:
“Now focus on the possibility of a” T junction” investment future where markets approach a time-uncertain inflection point….Our actual scenario is likely to play out more gradually as private markets realize that the policy Kings/Queens have no clothes and as investors gradually vacate historical asset classes in recognition of insufficient returns relative to increasing risk.”
PIMCO, of course, were the original inventors of the New Normal concept, which the blog then adapted to describe our future world in which ageing populations dramatically change demand patterns. And the end-result of their new analysis comes to the same conclusion as the blog (their emphasis):
“If monetary and fiscal policies cannot produce the real growth that markets are priced for (and they have not), then investors at the margin – astute active investors like PIMCO, Bridgewater and GMO – will begin to prefer the comforts of a less risk-oriented migration”.
And their conclusion is simple to follow, namely “Global economies and their artificially priced markets are increasingly at risk, but the unwinding may occur gradually.”
The view from today’s mountain top may look fabulous. And as PIMCO point out, investors may decide to linger for a while, to enjoy it. But in the blog’s view, PIMCO’s view of the outlook is more likely to prove correct than that of the central banks.
Latest benchmark price movements since January 2013 are below with ICIS pricing comments:
PTA China, down 16%. “Stronger PTA futures on the Zhengzhou Commodity Exchange in China, on the back of financial institutions’ active buy-in activities, further bolstered PTA prices in the physical market.”
Benzene Europe, down 7%. ”Continued feedstock supply concerns amid European cracker restarts have boosted prompt pricing as well, and there are several aromatics units facing technical problems”
Brent crude oil, flat 0%
Naphtha Europe, up 3%. “Naphtha fundamentals have weakened slightly on lower domestic petrochemical demand and a slump in Asian exports,”
HDPE USA export, up 11%. “Global buyers uninterested in purchasing significant volumes”
US$: yen, up 17%
S&P 500 stock market index, up 23%