On Markets’ Valuation

This is my weekly column on Forbes.fr
It is available in French here

Here is the English version

The financial markets are carrying high prices in industrialized countries and this makes for some seriously tough choices for investors who want to invest their capital. Very low interest rates mean very expensive bonds. Meanwhile, the equity markets have recently staged a spectacular rally, particularly in the US after Donald Trump’s election. Seeking to invest savings on markets that are already expensive or very expensive is a difficult and complex process. In the past, we have always seen a wide range of assets with vastly differing valuations, so choices were easier as there were often assets that had been neglected by investors and carried a discount. But things no longer work that way for a number of reasons.

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The Fed is ready to hike its rate in December

The Federal Reserve continue to think that the long term value of the fed funds follows a downward adjustment trend. This reflects an almost pessimistic perception of the US economic trend even if no recession is expected.
In the short run the Fed expects to being able to increase its rate in December 2016 without creating damage on the economy. The US central bank wants to catch some degree of freedom in the way it manages its monetary strategy. But a hike in December doesn’t mean a strong upward trend for 2017.

The Fed’s message is almost pessimistic on the long run as it expects the level of its rate (the fed funds rate) will follow a downward adjustment. Last June this long term level was anticipated as being at 3%. In September it is expected at 2.9%.
The Federal Reserve thinks less and less that the economic cycle will converge to its pre-crisis features. It’s important as it reflects a kind of secular stagnation with low growth and limited inflation in the long-term. If we follow the Fed’s forecasts then we see that the nominal GDP growth is never expected to be above 4%  Before 2007 it was fluctuating between 4 and 6%. The Fed thinks that the US economy will not go back to this corridor and that’s the main reason for low interest rates. Continue reading

Uncertainty on financial markets: the role of central banks

Stock markets are trending downward very rapidly everywhere in the world. In France the CAC40 has lost 13.8% of its value since the beginning of the year. At the same time, interest rates converge to 0% or below. In Tokyo, the 10 year government bond yield is now below 0%. According to the FT yesterday, the volume of government bonds that is traded below 0% has now reached USD 6tn close to one third of the market.

How can we understand this phenomena?
Financial markets momentum depends mainly on expectations. Those latter are usually conditioned by economic prospects. But it is not sufficient at this moment. Communication from central banks is key to understand the current financial market behavior. Continue reading

What are the global economic trends for 2014?

The post in pdf format is here What are the global economic trends for 2014?

Four major factors could be said to sum up the global macroeconomic environment at the start of this year:

  • The global economy is experiencing a period of synchronized recovery driven by the US, where growth has been trending upwards since the summer. Europe is no longer hampering global growth, as it did from spring 2011. Japan is making a bigger contribution to global activity, thanks to the strategy pursued over the last year by Prime Minister Shinzo Abe. This trend reflects the predominance of industrialized countries during this recovery phase. The situation for emerging countries is more complex. China no longer holds the position of leader it had until very recently. The refocusing of its growth strategy onto domestic demand has affected numerous emerging countries, which must establish more autonomous sources of growth. These countries will bounce back, but investors will discriminate between these countries more than in the past. Continue reading