As I see it, markets are being tugged at by opposing influences at this point in time. First, the real economy is apparently still being assisted substantially by government stimulus. This is likely to increase, not decrease. Withdraw stimulus, and the consequences are easily predictable. But that is not going to happen, certainly not while the economy is in such precarious shape.
The other side of the coin is that stimulus must somehow be financed. So long as the markets are willing to finance it at low rates, all is well, particularly if inflation is low. But that also means that equities or other assets should be unattractive at the higher prices we're seeing. Thus, the things we are seeing (low rates, low growth, high stimulus and low inflation), imply stable or somewhat lower equity and asset values. But that is not what has happened as we have seen a substantial rally from the March '09 lows. Thus, it seems that equities (and probably all asset classes) are overvalued. If they continue to go higher, bubbles will form, and will form with a vengeance when credit loosens up. In the emerging markets, where the dislocation has not been as severe, bubbles already exist.
Ride the bubble, but watch out for lots of market turbulence as the two tectonic forces shaping things groan and slide and crash into each other.
Something has to give. Except for lots of volatility, I don't have enough of a crystal ball to suggest what will happen. |
