First there was the dotcom bubble. When it deflated, the U.S. Federal Reserve set interest rates at historic lows for far too long, in turn giving birth to a new asset bubble; residential real estate in America. We all know what happened to that asset bubble, and our world is still gripped with the consequences of its implosion.
How has the Fed responded? By establishing a near zero interest rate policy (ZIRP), which in turn has created a new asset bubble; equities. With the Dow Jones surging past 10,000 for the first time in a year, and Wall Street handing out executive bonuses at a rate that exceeds the previous best year for their self-congratulatory excess, 2007, by 10%, one would think that the global economic crisis is over.
Perhaps we are just witnessing a new and potentially more dangerous asset bubble being inflated by government bailouts and monetary policy courtesy of the Federal Reserve that has gone berserk. With the U.S. dollar plummeting like a lead weight falling off a cliff, and banks providing depositors with virtually no interest, it seems that it is a matter of policy to encourage stock market trading and speculation.
The question that must be asked is this; when accelerating levels of unemployment, contracting consumer spending and elevated levels of loan foreclosures make it clear that the real economy is still in deep crisis, how sustainable will this latest asset bubble prove? I think recent history has already provided an answer.
global economic crisis
asset bubbles, dow jones, federal reserve
Two contradictory financial trends are in evidence, in effect the Ying and Yang of the global economic crisis. The NYSE has experienced a steep Bear Market rally from its March lows, setting the stage for the Dow Jones to pass above the 10,000 level. On the other hand, the American greenback is plunging to new lows, having previously demonstrated impressive strength as a safe haven when the global economy imploded after the demise of Lehman Brothers.
Actually, there may be less of a contradiction than meets the eyes. If the U.S. national debt and annual budget deficits continue to expand with reckless abandon, it is inevitable that global market forces, especially the bond market, will set in stage a deep contraction in the U.S. dollar’s relative value. The apparent replacement of the Japanese yen by the U.S. dollar as the preferred vehicle for the carry trade seems to point in the direction of growing weakness. In that scenario, equities may, for a time, become the new flight to safety for investors.
The rise in equity prices may reflect an inverse relationship to the decline of the value of the American dollar, as opposed to a realistic market appreciation of economic fundamentals. Now, when the value of both the dollar and the Dow Jones plummet, what would that convey?
A global economic depression, most likely. At present, however, the inverse relationship of the U.S. dollar and NYSE merely reflects a synchronized global recession. The dangerous moment will come when the world’s central banks begin to engage their long-speculated exit strategies. Then, I think, we will witness volatility with both the American dollar and equity prices.
global economic crisis
carry trade, dow jones, nyse, u.s. dollar
