Words ought to be a little wild, for they are the assault of thoughts on the unthinking
- J.M. Keynes

Sunday, 26 May 2013

Edgar Allan Poe Markets

It has been a fairly fantastic May for those long risky assets despite the wobble in the second half of last week.
  • US, UK, German stock markets are near all-time-highs
  • European peripheral bond yields are near their recent lows and even insolvent Greece seems to be in favour
  • Junk bonds continue to eagerly sought by yield hungry investors
In short, risky asset markets are exuberant.

In contrast recent economic data doesn’t paint a picture of smooth sailing ahead:
  • US economy is limping towards a recovery and the employment situation is only slowly improving (based on jobless claims and unemployment rate). However participation rate is low which flatters the overall unemployment reduction numbers.
  • Data from Europe is disappointing with the core starting to splutter even as France and periphery sink deeper.
  • China is slowing and the much awaited instantaneous rebalancing towards domestic consumption doesn’t seem to be occurring.
  • Japan’s shock therapy is yielding undesirable results on the JGB front and mixed ones on the real economy (GDP printed higher but trade deficit widened).
The current market ebullience resonates with Edgar Allan Poe’s marvellous and macabre short story, ‘The Masque of Red Death’ (read here but be warned if you haven't read Poe before, he is not everyone’s cup of tea). Central bankers have become Prince Prospero and created a walled surreality within which the chosen few rejoice at having beaten the inevitable post-boom adjustment. Unfortunately, like Red Death, economic reality is going to gatecrash the party. Rather than chase yield, the time is to protect against an erosion of capital. The probability of survival is far greater outside of the central bank party.

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