In every asset boom most people expect it to go on forever because 'this time it's different'. In every occasion of asset boom like we have been enjoying, correction is inevitable and mostly painful. Yet not all the signals are consistent.
US stocks run on, and US economy seems firmly in recovery mode. Some of the world's prime investors are fearful of a big equity shakeout and losses in bond portfolio as the decades long bond rally ends. To Henry, today's graph showing US credit to GDP ratio from 1870 show a basis of this. It is a point made by some of the world's best journalists, including Martin Wolf, in his recent book, The Shifts and the Shocks. (At the Book Grocer in Melbourne, this nice hardback is available for $10, a real bargain.
Here is a quote from Wolf's final chapter, called 'Fire next time'.
'The kernel of the story ... is one of the interaction between global macroeconomic forces and an increasingly fragile, liberalized financial system. ... The idea that, in such a world, the central bank can target prices of goods and services while assuming that credit and the financial sector, which both creates and deals in debt, will be stable, is hopelessly naive. ...'.
The emerging 'Marcoprudential control' mechanism is peeping over the horizon, and is intended to cope with excess credit growth and asset inflation, if necessarily helped by tightening monetary policy. In Australia, APRA is credited with curbing growth of house prices what property owners and developers pray will be a soft landing. My guess is that more action will be needed and that a hard landing is likely.
In the global picture, only time will tell, but Henry shares Martin Wolf's judgment that the actions designed to ameliorate the damage in the crisis of 2007-08 - fiscal expansion, bail outs of financial institutions, super easy monetary policy, including 'quantitative easing - will make the next crisis worse, and harder to ameliorate.
In any case, if fiscal and monetary policies are not returned to some sustainable 'neutral' situation before the next crisis, governments, central banks and prudential regulators will lack necessary firepower.
The meaning of Australia Day
Lots of great Australia day commentary today. Paul Kelly's comment that Australia must face two truths about 26 January is highly relevant
'There are two truths about January 26, 1788. It was the threshold moment for one of the most audacious experiments of the Age of Enlightenment seeding a British settlement and society on the continent most distant from Britain under the practical yet visionary leadership of Arthur Phillip, in many ways the true founder of Australia who, against almost every prospect, had the insight to believe this convict colony at the ends of the earth would one day be “the most valuable acquisition Great Britain ever made”.
On the other hand: 'The associated truth is that the oldest civilisation on earth, isolated for thousands of years from the rest of the globe and hence extremely vulnerable, was unable to defend itself and suffered dispossession of its lands, ravage from disease, loss of life in conflict and loss of its way of life.
'Despite the initial good intentions towards the Aborigines displayed by Phillip, the great moral failure in Australian polity was the belief there was no place, no dignity and, indeed, no life for the original Australians.'
Read on here.
The Sporting Life.
Roger Federer sent 'Comet Kahoutec' (the brilliant Korean youngster who made the semi-final of the Australian Open against all expectation) from the court suffering blisters. Hyeon Chung will be back no doubt, and I suspect he will later wish he'd fought it out.
The pestiferous Poms at 5 for 8, has it ever been better than this? Last week I wondered why Aaron Finch was not opening for Australia in test cricket but there has been no explanation. Today I am forced to ask if Glenn Maxwell will get a go in the Australian team at any type of international cricket. 'He needs to train smarter' asserted The Boss, Steve Smith. Wish he'd take the trouble to be more specific, as his statement sounds like advice from a spirit in a seance, spelt out on the ouja board.
Well done to the bowlers. And imaging if Stark had been there to mop up the tail. All out for fourteen? What fun.
Anyway, just a couple of finals to follow in the tennis and normal sleep patterns can be renewed. And then the AFLW begins and then AFLM (practice matches).
Image of the week - Courtesy John Mauldin, read on here.