Is the bear taking the wheel? (part2)
When I began to blog here at Alpha.Sources it was right at the time when hurricanes Katrina and Rita were devestating the US and causing economic wobbles. Back then I hailed the time of the bear but was proven wrong. Obviously I am more cautious this time round but something certainly seems to be stirring in the market.
Consequently, as markets around the world become more volatile on the back of inflation expectations in the US as well as a falling dollar and rising rates in all major central banks, economist and investors alike are beginning to talk about the how bears might be replacing bulls on the world's asset markets. Meanwhile the Economist are encouraging investors to remember an old saying ...
"If you meet a bear in the woods, try not to panic or scream; on no account should you turn your back and run. As markets around the world have turned grizzly over the past two weeks, some investors seem to have forgotten the old hikers' maxim. After three years of big gains, many stockmarkets have tumbled by 10% or more in less than ten days. The loudest growls have echoed around emerging markets and commodities."
Moving on the reasons for rising volatility or the reasons for the absence of volatility the recent years ...
"So what has caused this burst of volatility? One popular explanation conjures up fears of rising inflation and hence higher interest rates (see article). Yet this sits oddly with the fall in bond yields and the gold price over the past week: if inflation were the culprit, you would expect both to have risen. The real puzzle is not why volatility has suddenly increased, but why it had been so low in the past year or so. The answer seems to be an abundance of cheap money, which lured investors into complacency. Now they are starting to demand higher returns on riskier assets. Emerging-market equities and metals, not (generally safer) bonds, suffered the biggest mauling in the past week. It could be a healthy correction."
And now ... the positive outlook for the unwinding of the global imbalances;
"For the world, it is best that America slows today. Later, imbalances will loom even larger. A few years ago, Japan and the euro-area economies were flat on their backs. Now they are growing “above trend”, so the world depends less on America than it once did. The boost to the world economy from China and India will last into the future, even allowing for mishaps. Wise investors should resist the urge to flee, reduce their holdings of risky assets and stare down the bear."
The Economist's Global Agenda elaborates on the topic here (walled for non-subscribers!) as well as this article from this week's print edition from the Economist. In terms of bears and bulls it is obviously a relative question. I agree with the Economist when they point to the relativity of the decline in asset market growth rates. For example the case of some emerging economies' tumbling already started a while back when the Japanese Central Bank decided to shift gears and abandon the strategy of pumping liquidity into the market to escape deflation. I am talking about carry trade here. More interestingly is obviously the Dollar compared to the Yen and Euro and this will be interesting to follow.