Since 2008 we’ve been trapped in a global slow-growth economic recovery. In an effort to boost economic growth in the face of rising debt levels, demographic changes, and the corrosive lingering financial insecurities of the Financial Panic of 2008, central banks have poured money supply into the global financial system.
This has had several results. It has perhaps averted a global depression. Perhaps it has allowed economic inefficiencies and misallocations to survive when they should have been recognized as wrong-headed. The Greek bailout comes to mind. A swollen money supply has certainly kept interest rates down. The results of such a tsunami of money have been many, both good and bad.
Most importantly for us, this money-flood has probably created asset bubbles in real estate, bond markets, and stock markets. In Europe, the melding of the private and public sectors has obscured our ability to truly know what is happening. And in China, money flows have been uniquely obscure.
That’s why we are witnessing such epic volatility in the stock markets of the world. Investors don’t know, indeed cannot know, what is really happening. The money flows in Europe, Asia, and elsewhere have been intentionally blurred to the extent that we’re all guessing. It’s about time we figured that out.
What DO we know? We know that the economy has a reasonable baseline. In other words, the global economy is not going to entirely dry up and blow away. We know that traditional valuation measures are somewhat warped by the inflated money supply, but probably not rendered useless. So buying bargains is probably still a wise choice.
What will happen? For all the reasons mentioned before, we don’t know. In the short term I would not be surprised to see more turbulence as investors attempt to guess the future. In the longer term I suspect we’ll all muddle by. In between, there may be bargains. I intend to snap those up as they emerge.