In the past three months, global asset prices have rebounded sharply: Stock prices have increased by more than 30 percent in advanced economies and by much more in most emerging markets. Prices of commodities — oil, energy, and minerals — have soared; corporate credit spreads (the difference between the yield of corporate and government bonds) have narrowed dramatically, as government-bond yields have increased sharply; volatility (the “fear gauge”) has fallen; and the dollar has weakened as demand for safe dollar assets has abated.
But is the recovery of asset prices driven by economic fundamentals? Is it sustainable? Is the recovery in stock prices another bear-market rally or the beginning of a bullish trend?
While economic data suggests that improvement in fundamentals has occurred — the risk of a near depression has been reduced; the prospects of the global recession bottoming out by year end are increasing; and risk sentiment is improving — it is equally clear that other, less sustainable factors are also playing a role. Moreover, the sharp rise in some asset prices threatens the recovery of a global economy that has not yet hit bottom. Indeed, many risks of a downward market correction remain.
First, confidence and risk aversion are fickle, and bouts of renewed volatility may occur if macroeconomic and financial data were to surprise on the downside — as they may if a near-term and robust global recovery (which many people expect) does not materialize.
Second, extremely loose monetary policies (zero interest rates, quantitative easing, new credit facilities, emissions of government bonds and purchases of illiquid and risky private assets), together with the huge sums spent to stabilize the financial system, may be causing a new liquidity-driven asset bubble in financial and commodity markets. For example, Chinese state-owned enterprises that gained access to huge amounts of easy money and credit are buying equities and stockpiling commodities well beyond their productive needs.
CORRECTION
The risk of a correction in the face of disappointing macroeconomic fundamentals is clear. Indeed, recent data from the US and other advanced economies suggest that the recession may last through the end of the year. Worse, the recovery is likely to be anemic and sub-par — well below potential for a couple of years, if not longer — as the burden of debts and leverage of the private sector combine with rising public sector debts to limit the ability of households, financial firms and corporations to lend, borrow, spend, consume and invest.
This more challenging scenario of anemic recovery undermines hopes for a V-shaped recovery, as low growth and deflationary pressures constrain earnings and profit margins and as unemployment rates above 10 percent in most advanced economies cause financial shocks to re-emerge, owing to mounting losses for banks’ and financial institutions’ portfolios of loans and toxic assets. At the same time, financial crises in a number of emerging markets could prove contagious, placing additional stress on global financial markets.
The increase in some asset prices may, moreover, lead to a W-shaped, double-dip recession. In particular, thanks to massive liquidity, energy prices are now rising too high too soon. The role that high oil prices played last summer in tipping the global economy into recession should not be underestimated. Oil above US$140 a barrel was the last straw — coming on top of the housing busts and financial shocks — for the global economy, as it represented a massive supply shock for the US, Europe, Japan, China and other net importers of oil.
DEFICITS
Meanwhile, rising fiscal deficits in most economies are now pushing up the yields of long-term government bonds. Some of the rise in long rates is a necessary correction, as investors are now pricing a global recovery. But some of this increase is driven by more worrisome factors: the effects of large budget deficits and debt on sovereign risk, and thus on real interest rates; and concerns that the incentive to monetize these large deficits will lead to high inflation after the global economy recovers from next year to 2011 and deflationary forces abate. The crowding out of private demand, owing to higher government-bond yields — and the ensuing increase in mortgage rates and other private yields — could in turn endanger the recovery.
As a result, one cannot rule out that by late next year or 2011, a perfect storm of oil above US$100 a barrel, rising government-bond yields and tax increases (as governments seek to avoid debt-refinancing risks) may lead to a renewed growth slowdown, if not an outright double-dip recession.
The recent recovery of asset prices from their March lows is in part justified by fundamentals, as the risks of global financial meltdown and depression have fallen and confidence has improved.
But much of the rise is not justified, as it is driven by excessively optimistic expectations of a rapid recovery of growth toward its potential level and by a liquidity bubble that is raising oil prices and equities too fast too soon. A negative oil shock, together with rising government-bond yields — could clip the recovery’s wings and lead to a significant further downturn in asset prices and in the real economy.
Nouriel Roubini is professor of economics at the Stern School of Business, New York University, and chairman of RGE Monitor.
COPYRIGHT: PROJECT SYNDICATE
US President Donald Trump has gotten off to a head-spinning start in his foreign policy. He has pressured Denmark to cede Greenland to the United States, threatened to take over the Panama Canal, urged Canada to become the 51st US state, unilaterally renamed the Gulf of Mexico to “the Gulf of America” and announced plans for the United States to annex and administer Gaza. He has imposed and then suspended 25 percent tariffs on Canada and Mexico for their roles in the flow of fentanyl into the United States, while at the same time increasing tariffs on China by 10
As an American living in Taiwan, I have to confess how impressed I have been over the years by the Chinese Communist Party’s wholehearted embrace of high-speed rail and electric vehicles, and this at a time when my own democratic country has chosen a leader openly committed to doing everything in his power to put obstacles in the way of sustainable energy across the board — and democracy to boot. It really does make me wonder: “Are those of us right who hold that democracy is the right way to go?” Has Taiwan made the wrong choice? Many in China obviously
US President Donald Trump last week announced plans to impose reciprocal tariffs on eight countries. As Taiwan, a key hub for semiconductor manufacturing, is among them, the policy would significantly affect the country. In response, Minister of Economic Affairs J.W. Kuo (郭智輝) dispatched two officials to the US for negotiations, and Taiwan Semiconductor Manufacturing Co’s (TSMC) board of directors convened its first-ever meeting in the US. Those developments highlight how the US’ unstable trade policies are posing a growing threat to Taiwan. Can the US truly gain an advantage in chip manufacturing by reversing trade liberalization? Is it realistic to
Last week, 24 Republican representatives in the US Congress proposed a resolution calling for US President Donald Trump’s administration to abandon the US’ “one China” policy, calling it outdated, counterproductive and not reflective of reality, and to restore official diplomatic relations with Taiwan, enter bilateral free-trade agreement negotiations and support its entry into international organizations. That is an exciting and inspiring development. To help the US government and other nations further understand that Taiwan is not a part of China, that those “one China” policies are contrary to the fact that the two countries across the Taiwan Strait are independent and
RSS