Bubblicious

POP! No..not quite yet…but close.The S&P has reached a new high, up 200% less than 5yrs post the “great-recession” of our time...and it's not just the US..FTSE All world index is also up 150% since March 2009. What's that you ask? What crisis? Exactly. Sure, we all enjoy living in a bubble, one that the Fed has gladly blown larger and larger akin to an excited teenager testing the limits of their watermelon-flavoured-bubble-gum, pumping once mind-boggling sums of cash into the petrified financial system. We all love the good times when dancing around in the midst of seemingly endless quantities of monetary protection, relishing the cloak of invincibility, oblivious once again to the potential impending disaster of lackadaisical activity in the world’s still fragile financial markets…but nothing lasts forever – just ask Christine Lagarde. Who would have thought that Dominic Strauss Khan – when sat in his NYC holding cell ashamed by his lust for room (ahem) service with a twist – would have the last laugh..ahh..the wonderful manner in which time always turns the tables.

Hence this piece is predicting a global correction before the end of 2014..but one that will slightly dampen the moods of only those that have been lucky (prudent?) enough to make use of the unprecedented and non-symmetrically focused monetary easing.

Plenty have questioned this approach over the years, plenty will continue to do so. It seems we have only papered over the cracks in an otiose effort to protect the common investor whilst selectively rekindling the risk-loving appetite of the upper-echelons of the wealth-class – is it really fair that 70% of home-owners continue to suffer from negative equity when the likes of Bill Ackman generate new billion-figure profits in just 3 months (the wiley investor managed to grill-himself a handsome $200m in just one day from Burger King’s buy-out) and Buffet’s share price equates to a studio appartment? Hmmm..something is off in this “recovery”. The new world of income disparity we find ourselves in has brought gauges such as the Vix to a seven-year low. Given the feeble state many of the world’s largest economies still find themselves in, this unrestrainedly comfortable approach to investing is illogical. As we all know (yet somehow still ignore) once the warm embrace of these Central Bankers begins to unravel, leaving investors to stand alone in this new financial world environment, the shivering will commence, with risk of many submitting to hypothermia at the shock of being left out in the cold.

For now though, the rich out there are simply not frightened. Cozy and warm in fact they appear. Witness the unbounded joy they express in throwing money into risky asset classes, deceptively unworried by the illusion of a protector in the form of political redress. Those that were cash-rich in 2008 have been disproportionately rewarded for doing what they do anyway..great gig if you can get it! The not-so-rich are confused as to what exactly is going on and simply not participating. Central Bankers are faaaar too relaxed it appears, even Draghi has the gaul to crack a smile during his press conferences – ominous signs all around!

The operose discussions surrounding much of the financial industry were once eagerly followed by even those with zero interest in their bank accounts (pun intended) – that has quickly dissipated as we have returned to less weighty subjects of interest for the masses…such as ice-water being thrown over “celebs”…a worthy original cause, now flyblown by the facetiousness of social-media. Recent capital raises by China’s banks, barely noticed despite the eye-watering amounts (>$50bn in the last several months) indicating a subtle attempt at dealing with otherwise extremely worrying non-performing loans. Asset-price inflation and general madness in Africa manifesting itself with $1,500/night rates for barely 2* hotels in Angola (where there are commodities, there are Chinese and price-hikes!). Latin American nations are mixed between recovery (Colombia) and bankruptcy (Argentina) with standards of living beguiling for what we term 1^st world nations.   

Are we really as safe as we believe? It is not meant for the hard-working individual looking to provide a decent quality of life for his family to worry about when Yellen will raise rates or how many members of the Bank of England’s MPC abstained in the recent vote..but a worrying degree of apathy has returned to the global conscience as far as the financial markets are concerned. Recent stock performances indicate a plethora of only wealthy investors taking part and taking away all the profits to boot!

This is not equality at is finest, the silver-lining possibly only that when the elasticity of our current bubble is finally pushed beyond its natural gooey-limit, bursting in spectacular fashion, it will only splatter over the faces of those doing the blowing. The rich will become slightly less rich, the less well-off will be..well..they don’t really care do they? They were never part of the Fed’s plan in the first place, were overlooked by the ECB and totally ignored by the autocratic Chinese, left to deal with their own pay-cuts and extra working hours to fill the gap of placing bread on the kitchen table. With so little to show for the last 5 years anyway, the less well-off will thankfully come out of the next bubble splatter relatively unscathed.

We are in a very tricky period. There are those that understand we are currently floating in a bubble, there are those that know it yet avoid admitting it and there are (worryingly) those that remain oblivious. In this case, ignorance is not bliss. Central Banks must carefully figure out a way to embark upon the seismic shift from continued intensive care to general recovery.

As any patient knows, the real-pain comes after the initial dosage has been reduced and the tougher task of rehabilitation commences. Immense effort from all involved is necessary to transition from a bed-riddled economy to one that can stand-up of its own accord.

Shoving deliciously fruity, addictive bubble-gum in their mouth and hoping for the best, won’t stick.