Finance and investing: A peaceful uneasy feeling
William De Vijlder
Economic adviser to the general management of BNP Paribas, Professor in economics at Ghent University
Comforting economic news and low levels of the ‘fear gauges’ in markets reflect a peaceful environment, yet investors feel unease.This is healthy and should prolong the bull market.
Peaceful
The cyclical environment looks peaceful. The US should continue to grow at a satisfactory pace, European business and consumer confidence have picked up and Japan is digesting its VAT rate increase rather well. More interestingly, the IMF opined in early April that the downturn risk in developed economies is near zero. In addition, tensions in financial markets, as shown in an index calculated by the Federal Reserve of St Louis, continue to hover around extremely low levels.
Unease
Yet several factors are creating a feeling of unease. First, lacklustre growth in developing countries and in particular China continues to be a source of concern. Two, Wall Street has been on a rising trend for a long time. While this does not automatically imply that the party is about to end, the awareness that all good things come to an end, means that concern is quite understandably, rising . Three, some of the excesses seen during the credit boom before the Global Financial Crisis of 2008 have made a surprisingly swift comeback. The terms of covenants governing bonds issued by corporates are becoming distinctly more favourable to the borrower than the lender. Fourth, people still struggle to understand why, against almost all expectations, government bond yields have declined so much this year: are bond investors sensing a structural slowdown that equity investors fail to see? Finally, Wall Street’s fear gauge, the VIX (an index which reflects the implied volatilities of S&P500 options) is at very low levels – just like its more elaborate peer mentioned above, the stress index of the Federal Reserve of St Louis. Without going into the technical details, when fear gauges give low readings, it means investors are quite relaxed about the market outlook. Yet, the longer this lasts, the more often you will hear the comment that ‘this cannot last’ and indeed historically we have seen big jumps in risk levels after long periods of calm.
Absence of euphoria
The multi-million dollar question is ‘what could cause these peaceful uneasy times to make way for turmoil?’. The sheer length of a bull market is not an answer. I would even argue that the slow US recovery, which is getting into its sixth year, implies that it will take a further several years before the usual tensions of mature business cycles manifest themselves: excessive build-up of productive capacity, excessive home building, inflation, rising real Fed funds rate, etc. These tensions eventually develop into a crisis and trigger a recession. This means that we’re in a long business cycle and in a long stock market cycle – provided the Fed doesn’t spoil the party (it seems unlikely to) and that the market does not get ahead of itself, meaning that it doesn’t rise more than earnings.
Indeed the biggest risk for the longevity of the current business cycle is that investors get too excited about it. There is a silver lining in the proliferation of articles arguing for caution. It reflects a certain risk awareness and an absence of euphoria. This is comforting and should stop expensive asset classes ending up in bubble territory. The price to be paid is many articles about dark clouds even though the sky looks blue to me.
William De Vijlder
Vice-chairman BNP Paribas Investment Partners
credit officer a( SME) at State Bank of India
10 年I do not foresee any immediate downturn in the bull market. I think many retailers who incurred losses in the last crash are still keeping. If you analyse the Indian stock market many of the stock which contributed to the 2008 peak are yet to reach that level. Many of the stocks which are trading at the peak now were not at this level in 2008 stock market peak. Many sectors such as infrastructure are yet to show a rise. There is an atmosphere of caution and fear of repeat crash. The housing and mortgage market is not at boom. As you rightly said there is peaceful unease. For another crash to come it is necessary that players forget the last one and play without fear. which will take a longer time. The market is rising but steadily.
Public Policy Analyst
10 年An energy solution is the key to economic stability and expansion (for our future). We (the US) have spent trillions of dollars on wars. We need to find a global energy solution, then work on global solutions for cleaner air, water and food. This is basic survival stuff for the future. Yet, the world is busy "going the other way." One crisis leads to another. We need to turn the corner. Thanks William!
A Tavola PFL/ Arete LLC
10 年Its not the strongest who survive, nor is it the smartest. It is the one that accepts that change is a constant and thus adapts and evolves to its surroundings...
Indirect Buyer/Contract Manager II at Subaru of Indiana Automotive
10 年The economy still hasn't fully recovered and they Dow is at record highs. Sounds like a bubble to me. How much of it is because the government is buying billions of bonds every month? The auto industry is on the verge of having a retraction. All of these new cars and who is buying them? Banks want 20% down now and approximately $550/month with good credit not very many people realistically can afford that. Used cars are just as bad now with a vehicle with 100k+ miles still going for $9-12k. If the auto industry slows down, we are in trouble. It is one of the few industries that is doing well. The recent unrest in Iraq will probably cause gas to creep over $4/gallon again as well. Put all of this together and we are looking at another recession 3rd or 4th quarter this year. I hope I am wrong, but I don't even see where we really got out of the last one...they said we did, but it sure doesn't seem like it.
Senior IT Consultant
10 年I do pay attention to international markets as I do some stock trading in my spare time. What's extremely worrying right now is that the PIIGS countries are not doing well. Italy is an excellent example. People are closing their businesses because they can't afford to pay taxes anymore, which means lower taxes collected and more burden on the governments (all these new unemployed people). It seems that businesses are better off closing their shops. There is something seriously wrong in this whole formula. I think there is a huge market connection soon.