Barclays’ Chief Executive Officer Jess Staley said that “the mood at the World Economic Forum in Davos reminded him of 2006, when everyone thought they’d solved the riddle of financial crises”. Staley, speaking at a forum in the Swiss Alps on Tuesday, warned against such complacency and said that a combination of stock markets at record highs and volatility near all-time lows wasn’t "sustainable" in the long term. He said companies were too reliant on cheap debt and low interest rates.
The International Monetary Fund warned on Monday that while the economic outlook for this year and the next was better than previously anticipated, a recession may be closer than many acknowledge. Irrational exuberance in financial markets was one of the causes of the 2008 banking crisis, which led to a global recession.
Harvard University professor Kenneth Rogoff also sees risks and is worried about a potential rebound in inflation-adjusted interest rates. “If that was to happen, then countries with weak growth and high debt such as Japan and Italy could suffer”, he said on the same panel.
"If interest rates go up even modestly, halfway to their normal level you will see a collapse in the stock market,” he said.
Let’s take the numbers now. In November 2016 DOW was trading around 18,000 just before USA elections. A year after when Mr Trump elected US president DOW was trading around 23,500 – 30% increase year to year.
Today 24/01/18 DOW is 26300 – 12% increase in just 2 months.
Many they call it, the Trump trade …. why? Too many promises about investing in infrastructure (no one saw anything yet), health reforms that (no one knows if it will work), tax cuts that have short term positive outlook. While the US working people are benefiting from increase on salaries, nobody cares about the government income that is lost from those reforms, creating huge deficit for the coming days. Twice in the last 2 months the US faced a government shutdown, will the congress continue to approve additional budgets to save Mr Trump? We have worldwide geopolitical tensions that markets overshadowed, we have monetary normalizations that markets overshadowed. We have extreme low volatility in the markets, low returns compared to the time of holding an asset and compared to the value of that asset. And the worst scenario of all is the lack of fear. When people becoming over optimistic and they do not afraid, that is a point where you have to worry. When and how the next collapse will take place is a question that needs to be answered in the upcoming months.