Everyone seems to agree that the recovery’s going to be slow (except maybe in Asia), and many actually doubt it can be sustained at all. And yet the markets keep rallying.
Faced with the choice of nominal gains or no gains at all, investors have opted for the former, in the hope that they’ll come out ahead once the economies have finished resetting. In the euphoria of the last few months it can be argued many investors have actually been unable to distinguish between real and nominal gains — blame the short attention span a pile of cash earning 0% causes — and have bought into the rally with commitment, ignoring the naysayers’ warnings of a repeat of the whipsawing markets of the Great Depression. The central banks, of course, are just relieved the naysayers are being ignored, regardless of what’s going on: they’ve run out of tools so the perception of confidence and control are all they can offer. Anyway, who’s to say the rally is unsustainable or that this is a fool’s rally — aren’t markets the only authority on themselves?
I claim no expertise at interpreting the wider economic implications of what’s going on, but it’s becoming apparent that what’s happened is that inflation, the beastie we were all fearing has been replaced by devaluation, it’s more subtle twin. The FT had a good article examining how cross-currency investors were possibly the best positioned for last year’s meltdown (though clearly the right combination of currency and asset was crucial). The traditional safe havens, US treasuries and gold, have become less attractive, both because inflation has been under control and because of their own problems (US treasuries are dollar-denominated and don’t offer a yield, and gold has reached a psychological ceiling).
So, my view? Nothing you haven’t heard already, I’m afraid: Inflation in the mid-to-long term, and whipsawing markets in the short term. Great time to be trading currency :)
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