Financial markets: this time is really different

A cura di Walter Snyder, Swiss Financial Consulting

This Newsletter has repeatedly mentioned various aspects of the current global financial situation with reference to enormous sovereign debt, zero and negative interest rates, the Fed`s interest rate rise policy, inflated equity prices, market manipulation, the over-priced US dollar, the Chinese plan to have the renminbi compete with the US currency and the duration of the current rally. If one adds to all that the present unstable geopolitical situation in Syria and North Korea with worsening relations between the US and Russia the scene is set for upheaval.

Germany and China continue to have great trade surpluses while the US trade deficit has not yet been corrected by the Trump administration. Oil is still the most important source of energy with the Middle East a main supplier. Given these additional factors, it should be clear that any disturbance will have far-reaching consequences since the Fed, ECB and BoJ cannot lower interest rates to fend off a recession or depression. The huge injections of liquidity into the global financial system in recent years have had the result among others of producing little or no growth.

In this context the last three interest rate rises of the Fed assume greater importance since the goal is to have interest rates at a level where it will be possible to implement corrective measures in case of an economic slowdown. That means that the base rate will have to be at least 3% in order for the Fed to be able to have any influence on the economy by lowering rates. The ECB and BoJ in this sense are not players in any sense.

The real problem is that the envisaged therapy risks causing great harm. The slow and reluctant recovery in the US may be blocked by rising interest rates as companies have become addicted to cheap credit. Instead of investing in capital expenditure, research and development, companies have preferred to engage in expensive share buyback programmes with the meager profits that have been made.

This has contributed to the high P/E ratios which are not at all justified by reality.

Americans seem to have lost touch with the real world by fixing equity prices according to future expected earnings. The prices of stocks like Amazon, Apple, Facebook, Netflix, Microsoft, Tesla and many others are not realistic. Taken altogether all these factors create a dangerous situation that is unlike any other economic bubble in the past. “Honi soit qui mal y pense”. Investors had better position themselves defensively before the IMF meeting on 21st April.

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