It’s pretty rough out there in financial markets. Stocks are still falling, notwithstanding the odd counter rally here and there, and yields are still rising, leaving investors with little in the way of a place to hide. I think it is relatively simple to explain what’s going on, in general terms. Before the pandemic, markets were propelled higher by low inflation, low bond yields and plenty of monetary accommodation. Running the economy hot was not just relatively cheap—in terms of the classic trade-off between stocking growth and employment and inflation—it was the right thing to do. I mean, you wouldn’t want unemployment to rise, would you? The initial roaring rebound in markets from the initial Covid shock in spring 2020, promised a quick return to “normal”. It didn’t last.
Read MoreBridgewater Co-CIO Bob Prince was ridiculed earlier this month for his comments in Davos that “we’ve probably seen the end of the boom-bust cycle.” Pundits were quick to draw comparisons to Irving Fisher’s infamous remark on the eve of the 1929 stock market crash that the equity market had attained “a permanently high plateau.” I sympathise with this interpretation of Mr. Prince’s comment. They come on the back of a 21% 12-month rally in the MSCI World, in an environment where trailing earnings have declined, by nearly 5%. In other words, the P/E multiple has gone from around 15 to just over 20 in the space of a year, and this in an environment where global growth has been slowing. To pile on even further, the recent performance of global equities has been ridiculous, with monthly returns over +2% since September. Naturally, the key for any medium-to- long term investor is to make sure to be long during such periods, but I under- stand if Mr. Prince’s declaration has contrarian investors running for exits. I can’t help but feel, however, that the world is upside down. The speed with which Mr. Prince’s comments was shot down seems to invalidate the contrarian position to me. I mean shouldn’t we be worried only if investors and analysts agreed with his comments.
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