EDITOR'S LETTERJohn Stepek
China’s burgeoning bull market
The global economy has been the setting for an epic tug-of-war in recent years, between the forces of inflation and deflation. Now – with China devaluing the renminbi – it looks as though deflation has won, says Tim Price. It’s scary stuff, and I find it hard to disagree with Tim’s take – indeed, we’ve said for a long time that the most likely endgame for the post-financial crisis era would start with a deflationary scare.
However, “scare” is the important word here. Markets have a nasty habit of doing the one thing that you’re least prepared for. So if we take a step back and look at what’s going on, what do investors seem least prepared for right now?
It strikes me that, with bond yields at record lows (and so prices at record highs); commodities having crashed down to levels not seen since the 2008 financial crisis; and the US dollar leaving all other currencies flailing in its wake; markets are more prepared for deflation and tighter monetary policy than they are for inflation and looser monetary policy. Given that this is the exact opposite of what central bankers across the globe (including in China) want to see, do you really think we’re going to get it?
Markets are wobbling all over the place as they try to get to grips with what China’s move means, and we’re already seeing the likes of bond “guru” Jeffrey Gundlach – probably the most respected bond investor in the world right now – warning the Federal Reserve that it’ll be opening Pandora’s box if it hikes interest rates next month.
• Read the full editor’s letter here: China’s burgeoning bull market