Friday, January 8, 2010
Markets will believe anything
The markets are beset by a series of contradictions. They are dependent on extraordinary amounts of government stimulus. But that stimulus is in turn ultimately dependent on the willingness of markets to finance governments at low rates. They should be willing to do so only if they believe that growth prospects are poor and inflation will stay low. But if they believe that, investors should be unwilling to buy equities and houses at above-average valuations. At some timeâ€”maybe in 2010â€”those contradictions will have to be resolved. And that will trigger another nasty bout of volatility.