Likely inflationary burst to save debtors a red light for investors amid overvaluing
Environment of extreme bullishness combined with a low short-term rate is an explosive combination
When equity markets seem unstoppable, rising relentlessly on good, bad or no news, investors slowly forget what equity prices should represent. When markets have seemed quasi-invincible for more than 10 years, with every decline recouped extremely rapidly, thinking about what equity prices represent can be more a liability than an asset. “Buy the dips” works so well it is easy to build a narrative about it. But is it different this time?
Bubbles need leverage to develop. Rates below a certain level could have a detrimental effect on the real economy as investment in new productive capital becomes less elastic and rates decline on their way to 0%. Zombie companies survive, preventing “Schumpeterian” creative destruction and leaving excess supply in place, pushing inflation down and meaning savers have to spend less as their capital returns decline. The only thing thriving is finance, where actors put on more and more leverage to buy existing capital, through buybacks and M&A......
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