Satyajit Das: The market is too optimistic

Satyajit Das, author of Traders, Guns and Money and A Banquet of Consequences, is worried about the financial system. Optimists argue that “economic prospects are sound, with globally synchronised growth, low inflation, strong labour markets and buoyant asset prices”. But this ignores “low labour-force participation rates, low wage growth, limited productivity growth, weak capital investment and continued imbalances in global trade and savings”. They are also too relaxed about “fiscal deficits, accommodative monetary policy and perpetually increasing debt”.

Still, Das wouldn’t short the market immediately as “a major fall in asset prices or a substantial slowdown in economic activity is unlikely to be tolerated”. Instead, “policymakers will reduce interest rates (potentially into deep negative territory), resume asset purchases and increase government spending to preserve the status quo”. Central bankers are still intervening heavily – the Bank of Japan “now owns about 75% of all listed Japanese exchange-traded funds and is a top 10% shareholder in 90% of Japan’s listed equities”. Similarly, “the Swiss National Bank has become a major shareholder in many US companies”.

But in the long run, “higher asset values are neither permanent nor sustainable”. Central-bank intervention “distorts capital allocation” as “low interest rates allow zombie companies to survive, delaying bankruptcy and preventing capital from being redeployed”. This “stable instability” cannot last forever. “It will end, as always, in a Torschlusspanik moment — a German word for last minute, or literally ‘door-shut-panic’ — as investors try desperately to exit when they fear that stable instability is tipping over into simple instability.”