Normal Recovery or Not? Having Your Cake and Eating It Too
The comments which follow from Larry Kantor - head of research at perma-bullish Barcap (Barclays Capital) - are cited in this short piece at the FT Alphaville site.
In our view, the main risk to the current bull market in stocks and corporate bonds is not that the global economic recovery will falter. Rather, we believe that it is the strength of the recovery itself — or at least the recognition of it — that provides the greatest source of risk to the continuation of the market rally.
Once investors embrace that a “normal” recovery has arrived, they will quickly conclude that the current “crisis” settings for policy — such as near zero interest rates — are no longer appropriate. That — along with the impending withdrawal from direct purchases of duration by central banks — will drive interest rates higher and make it much more difficult for stock and corporate bond prices to keep rising.
In other words, the good news that the patient has recovered will shift toward the more sobering news that the bill has come due. That recognition — which is likely to be fostered by still more positive surprises on the economic data front, especially in the US — will be the signal to reduce exposure, and it could well come before the end of the year.
What is most unsettling about this "analysis" is the somewhat contrived manner in which one is left not knowing which outcome the author really favors.
Either the economic and financial recovery will be a "normal" one or it won't be - but hedging bets by inserting the conditionality about how monetary policy will derail the recovery in markets with knock on effects for the broader financial economy - seems like a classic case of wanting to have your cake and eat it too.
In our view, the main risk to the current bull market in stocks and corporate bonds is not that the global economic recovery will falter. Rather, we believe that it is the strength of the recovery itself — or at least the recognition of it — that provides the greatest source of risk to the continuation of the market rally.
Once investors embrace that a “normal” recovery has arrived, they will quickly conclude that the current “crisis” settings for policy — such as near zero interest rates — are no longer appropriate. That — along with the impending withdrawal from direct purchases of duration by central banks — will drive interest rates higher and make it much more difficult for stock and corporate bond prices to keep rising.
In other words, the good news that the patient has recovered will shift toward the more sobering news that the bill has come due. That recognition — which is likely to be fostered by still more positive surprises on the economic data front, especially in the US — will be the signal to reduce exposure, and it could well come before the end of the year.
What is most unsettling about this "analysis" is the somewhat contrived manner in which one is left not knowing which outcome the author really favors.
Either the economic and financial recovery will be a "normal" one or it won't be - but hedging bets by inserting the conditionality about how monetary policy will derail the recovery in markets with knock on effects for the broader financial economy - seems like a classic case of wanting to have your cake and eat it too.
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