Careful what you wish for
It’s starting to feel a lot like 2007 all over again. Nothing can phase investors. Even though the oil price is high enough to make you wince every time you go to fill your car with petrol, no one seems worried about its impact on the global economy. Events in Egypt have barely registered. Even an interest-rate rise from China this week couldn’t knock markets off their stride.
Why the complacency? Blame central bankers. Investors are happy because they are convinced that Ben Bernanke and his global peers won’t spoil the party. Inflation might be rising, but central banks can be relied on to stay firmly behind the curve. Real rates are still low in China, so a little quarter-point hike won’t derail the economy (yet).
News that the US added far fewer jobs than expected in December (36,000 versus hopes for 145,000) was also welcomed. Some pundits reckoned this was because markets were focusing on the fall in the unemployment rate. But there are a lot of ways to interpret this, not all of them positive. I’d say the market reaction was at least as much a case of investors thinking: “Phew! Bad job figures! That means more stimulus is on the way!”
But investors should be careful what they wish for. It’s true that tighter monetary policy would inflict at least some short-term discomfort. But letting inflation get out of hand could be far worse.
• Read the full editor’s letter here: Careful what you wish for