In 1952, the motto of the US Democratic party was, “You never had it so good”. Well, have those times come around again? Following the rocky ride since the banking crisis of 2008, many world markets have recovered and indeed exceeded their previous heights.
So, will history repeat itself? Will we witness further financial meltdowns like those seen in 1929 following the rampant runaway economics of the Roaring ‘20s? Or, will there be another technology bubble, like that following the Dotcom boom of the 1990s? If bad things really do come in threes, are we waiting for the next financial crash to occur?
It’s true, markets have recovered, but at a leisurely pace. There have been no real bubbles blow up to bursting point. In fact, the world economy is doing so well that one might justifiably ask, “Prime Rate crisis? What Prime Rate crisis?” The S&P 500 is higher, as are a multiple of earnings over the past 10 years. Canada and Australia have likewise shown good, solid growth, along with Europe even despite wild political instability.
Other, newer markets, like cryptocurrencies, have also shown great fortitude. Even following a shock to the system when China banned the sale of cryptocurrencies via Initial Coin Offerings, the market sold off but bounced back a short time later. Naysayers must be getting tired of calling the top of the Bitcoin or Ethereum rallies, considering they keep on getting it wrong.
The big worry is the status of the credit markets. With borrowing rates at historically low levels, the only direction for rates to go is up. The Fed has already tinkered with rate tightening, raising rates twice in 2017.
A significant concern is international investors’ willingness to buy bonds in countries like Egypt and Iraq – something they would never have done 10 years ago. However, emerging markets have also shown real growth over the past eight years making the assets of those countries increasingly attractive.
One other apprehension is that there is the growing population of grey foxes in the West. People are living longer, which means that their priorities lie in saving and less on spending. This is a problem that has beset Japan for decades.
Politics could also upset economic stability. Fears over the future of the Korean peninsula or Europe could easily prompt currency collapse and future inflationary pressure.
The key element is long-term interest rates, which have been falling since the 1980s. Providing these can be kept to manageable levels, then the risk of runaway asset prices will be kept in check. International governments must keep their credit levels low to support recovering world economies, and they should raise rates gradually to control any inflationary pressure. With a rise in global interest rates, quantitative easing could again be placed on the table as a method of stimulating economies.