A bull market in bubble warnings

published 1 August 2014

Another week, another warning that stock markets are looking frothy. In June, the Bank for International Settlements, an organisation of central banks, highlighted the "puzzling disconnect between the markets' buoyancy and underlying economic developments globally".Last week, the Institute of International Finance (IIF) did the same. Such warnings have become more frequent in recent months.

The gap between the fundamentals and the performance of equities is worrying. Bank of America Merrill Lynch (BAML) notes that, since March 2009, world stocks have jumped by 190%, but US GDP is up just 18%.

The problem is the inevitable hangover after a credit boom and bust. Companies and households have been concentrating on paying their pre-crisis debt loads down.The printed central-bank money intended to boost the economy remains "trapped in Wall Street to the benefit of equity prices". With plenty of cash still parked on the sidelines, further gains are likely, says BAML.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

But eventually there will be a setback perhaps caused by signs that interest rates will have to go up faster than expected, thanks to rising inflation. Investors know this, says Jeremy Warner on Telegraph.co.uk, yet they keep riding the rally.

They're not delusional. "It's just that years of central-bank money printing has compressed returns to a point where there is nowhere else to put your cash. There are few good alternatives to buying poor value for money. This bizarre state of affairs is almost bound to end badly. The only question is how badly and when."

Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.

After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.

His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.

Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.