Stephen King at The Independent can see the termites eating at the foundation of Global Recovery Estates.
- the PE ratio of the US equity market is far above its long-term average; "equities today offer the same kind of excellent value that was available in 1929";
- housing bubbles in the UK and much of the US;
- the massive US current account deficit;
These three oddities suggest that bubbly behaviour still persists. People are still prepared to pay more than before for owning equities. They're prepared to pay a lot more than before to own houses. And they're prepared to carry on borrowing in ways that we've never seen before.Indeed, the first argument is basically a rehash of "New Economy" thinking of the late 1990s. The second is just plain wrong. Indeed nominal short-term interest rates are incredibly low. But real long-term rates which one would think informs purchases of equities, houses, and durable consumer goods are not particularly low at all. King recommends a "weak dollar" policy but fails to show just how weak the USD must get to start chipping away at these imbalances. After all, a 13% decline over the last two years didn't make a dent in the current account deficit. With a global economy still highly dependent on US consumption and East Asian central banks still determined to buy dollars no matter how poor an investment, a weak dollar policy faces one hell of a Sisyphean hill to climb.
At a pinch, it might be just about possible to justify this behaviour. Those who seek to do so rely on two arguments. First, they point out that we're seeing a supply-side revolution which is transforming the world economy, driven by new technologies and the arrival of new economic powerhouses such as China. If this means stronger long-term growth, that might justify higher asset prices today than in the past.
Their second argument relies on the observation that interest rates are quite a lot lower today than they used to be. A lower discount rate justifies higher asset valuations - hence more expensive shares and houses - and also paves the way for higher sustainable levels of debt.
These arguments are all very well but, in my view, they don't really make an awful lot of sense