It’s difficult to see how anyone could be pessimistic in this economy: with consistently low interest rates, a significant increase in big company mergers and acquisitions, growth in the Far East of exponential proportions, and an all-time high in Wall Street and London financial city bonuses, the economy and the markets look set to rock and roll in 2006 – and yet there are still plenty of dissenters. It makes me think that where trouble lurks is in analysts’ and traders’ underestimation about just how large the next bubble is being blown up right now.
Most of the economy naysayers point to inflated oil prices and the unresponsiveness of global equity markets to the impact of artificial ‘tweaking’ designed to get them going again in support of their bearish views, but the examples miss a greater extent of detail in thinking about macroeconomic boom-bust cycles.
When former Chairman of the Federal Reserve Alan Greenspan lowered interest rates dramatically after the market crash of the early turn of the millennium, most were expecting this to have the same designated effect it had had on past markets: namely, to give them a quick shove in the upward direction. When this didn’t happen, people started claiming that the Midas financier had lost his touch, but the criticism missed the point. Gone was a market environment where there was plenty of free capital waiting to be released at the right place at the right time: even if equity prices look cheap, if there’s no capital sitting in deposit accounts and in government bonds waiting to pounce on the opportunity of higher investment returns, then artificial processes of bolstering markets are redundant.
Having been hit with substantial blue-chip bankruptcies and more than a sixty percent fall in equity prices, it wasn’t just that the U.S. economy was in a dispiriting mood for capital investment, it was that there was very little to go around in the first place.