The old Dickens quote "It was the best of times, it was the worst of times" is
pretty much always applicable to a world as big and complex as this one. But
lately, as the disparity between financial markets (best of times) and geopolitics
(worst) has grown to almost comical proportions, Dickens has been sounding
even more apropos than usual. To take just a few "worst of times" examples:
- Palestinians are shooting rockets at Israel, which is responding with a full-scale
invasion that will end up killing many hundreds, including an appalling
number of kids.
- A coalition of Islamic radical groups called Islamic State for Iraq and
Syria (ISIS) is grinding towards Iraq's capital, home of the small city that
is the US embassy. What we'll do should it be taken is anybody's guess, but
odds are it won't be pretty. Meanwhile, Iraq's Christians are the largely-unnoticed
victims of the fundamentalist resurgence.
- Someone using advanced anti-aircraft missiles shot down a civilian passenger
jet over Ukraine, and Russia, Europe and the US are making all kinds of threats
and counter-threats as they try to apportion blame. There are an awful lot
of soldiers in a small space, and the press is now full of "Archduke
Ferdinand moment" kinds of analysis.
Meanwhile, global growth isn't looking so hot. See World
GDP Hopes Are Collapsing, which comes with this dramatic chart:
Now, contrast this dark vision with the financial markets, where the picture
has literally never been brighter. The US on Wednesday July 23: Stocks
mostly higher; S&P 500 in record territory.
And that's the tame part of the equities world. Emerging market stocks are
absolutely soaring. See: EMERGING
MARKETS-Indonesia, Russia gains push emerging stocks to new 17-mth high.
So what's happening? One would think that rational investors would be cautious
about buying volatile assets like stocks when there are so many geopolitical
landmines just waiting to blow up -- and when global growth is failing miserably
to meet economist expectations. Instead they're buying with abandon.
One possible explanation is that the world's major economies continue to flood
the financial system with credit which has to go somewhere. And with bonds
yielding next to nothing, equities (and real assets like San
Francisco houses and fine
art) are getting the bulk of it.
China's runaway train of an economy is exhibit number 1. See China's
debt soars to 250% of GDP:
China's debt has soared to two and a half times its economy, Standard Chartered
estimates, highlighting the difficulties Beijing faces in balancing growth
with the risk of bubbles forming in its economy.
Total financial credit has surged to 251 percent of gross domestic product
from 147 percent at the end of 2008, the bank said.
The article contains a must-watch interview with a guy from Motley Fool who
asserts, among other things, that China can borrow as much as it wants because
it owes the money to itself, and if it eventually needs to ease its debt burden
it can just devalue its currency and/or mandate higher consumer spending.
This is from the "current trends will continue forever because the government
will make it so" school of thought that typically marks the end of a given
binge. When people can no longer rely on fundamentals to make their case, they
turn to the delusion of omnipotent powers-that-be. Just go back to the dot-com
and housing bubbles for tons of such assertions from now-mostly-forgotten pundits.
To repeat something that's heard a lot these days, it's 2007 all over again,
and 2008 can't be far off.
