The Goldilocks effect
Market watchers across the globe are singing from the same hymnal: we are living through the 'Goldilocks effect'. The expression is derived from the eponymous fairytale in that markets aren't too cold (so as to trigger recession), nor too hot (so as to spark uncontrolled inflation). They're 'just right'. The economic state is broadly characterised by above-trend growth and low (but gradually increasing) inflation; in order words - perfect conditions for market-friendly monetary policy. For example, the American recovery of 2003-4 after the Dot-com bubble burst.
Fairytales
First, lets look to the world's largest economy. Simply put, America is humming. Even Donald Trump's volatile tweets and the cavalcade of controversies in DC have not been able to derail a speeding economy. Record jumps in the Dow have been beaten by the S&P 500 Index, which has enjoyed a 300% increase from the bloodiest lows of March 2009. Surveys indicate that even most (but not all) traditionally
bearish investors are buying in up to the hilt. Washington has enjoyed net increases in job creation for six straight years now, and overall growth matches that of
the immediate post-war boom in America.
At the centre of attention is the US tech industry, which as of this year makes up a whopping 24% of the S&P 500. Banner years from Facebook (up 53%), Google (up 35%), Apple (up 49%) and Amazon (up 55%) have accounted for a huge portion of the stock market's growth. At the same time these corporations employ very few people comparative to the titans of other industries (Amazon is a clear outlier here with half a million employees).
But it's not just Silicon Valley that is blooming - all over the world companies involved in cloud computing, video games, artificial intelligence and social media are roaring. Hong Kong, home to many of Asia's largest tech companies, may see IPOs from homegrown companies with a combined market capitalisation of
half a trillion dollars over the next 24 months. In Japan
the Nikkei crossed 23,000; a height not seen since 1992 (the beginning of the Lost Score). Indonesia has posted its
highest trade surplus in years; and even fears of a devastating Brexit have been largely replaced by expectations of
steady growth in 2018.
The headline that closed 2017 was the meteoric rise of Bitcoin and other cryptocurrencies and that too will undoubtedly continue to fixate amateur and professional investors this year.
Glitches in the Matrix
The party may well be in full-swing right now but we also know that all things must end eventually, and some sooner than others.
The dark cloud on the horizon for America (and by virtue of its size, the rest of us) is that the Goldilocks Effect usually occurs during the recovery and growth phase of an economic cycle, i.e, before a peak is reached and another contraction occurs. But looking back over the years since the global financial crisis, recovery in most developed countries has actually been rather lacklustre.
Much to the dismay of the Federal Reserve, inflation has bobbed well below the target of 2%, and has in turn hobbled wage growth. Many Americans have not seen a rise in real wage growth for a decade, even as Wall Street continues to charge. Likewise, the United Kingdom is set for
the worst wage growth of any advanced economy this year with the Exchequer battling a decline in the Pound.
For investment guru Jeremy Grantham, this is a fatal flaw. GMO's storied chief investment officer believes that within 6 to 18 months we will have entered a
'melt-up' phase of growth; which means we'll see even stronger equity market surges as a bubble forms. In the red-hot crypto sector Goldman Sachs has sent up
the warning flare over Bitcoin. As has Grantham himself, and as have many others. Scepticism is rising almost as fast as the cryptocurrencies themselves.
Meanwhile the US Federal reserve is trying to contend with
a flat yield curve (when short and long-term interest rates converge because of higher perceived long-term risk) - usually a market signal that precedes a recession. But this time there is disagreement within the central bank as to what it means. In equally worrisome news the
Fed is sending mixed signals as to just how the Trump tax bill will impact gradual fiscal tightening. Incoming Fed boss Jerome Powell arrives just as the bill (which is primarily a gift to the corporate sector) gives a hearty slap on the rump to an already stampeding bull market.
Everywhere, from
rural Australia to Chinese metropolises, personal debt-levels are ballooning to unsustainable levels. Fiscal deficits in
countries like India are rising stubbornly - of the world's 10 largest economies just one (Germany) is running a budget surplus. While early signals show growth holding steady in China (the world's second-largest economy), there is a lot of the year yet to run and
the economy is expected to cool. If it does, the flow-on effects in Southeast Asia and beyond will be significant.
Meanwhile venture capitalists are deploying ever-increasing pools of funds into startups at gargantuan private-market valuations. Even some of the newer businesses getting funded - think Silicon Valley's Juicero (the ill-fated US$400 juicer),
China's toilet-paper-sharing app, or the 101 other 'sharing-economy' or 'gig-economy' ideas - rekindle memories of 1999.
And behind it all is the scandalous rapid growth of wealth inequality that is hard-wired into the global economy. Tens if not hundreds of millions of people are running out of water, food and basic necessities across the world - from Burma to Venezuela. The risk of population upheaval, famine and conflict is a constant hum in the background. One that will be much harder to ignore once the music stops.
Make hay while the sun shines but also heed Aesop's fable of the
ant and the grasshopper.
