*Negative real interest rates are fuelling rally in risk assets like equities*
- Fears of reluctance by politicians to unwind massive fiscal stimulus programs and similar pressure on Central banks to continue their ever-rising bond buying programs to stimulate economic growth is leading to concerns of debasement of paper currencies and sharp rally in precious metal prices like Gold and Silver.
- Usually negative real rates spur huge capital expenditures by businesses but with weak aggregate demand due to job losses, pay cuts, health concerns etc; private sector is unwilling to invest.
- Stretched Balance Sheets with loss of revenues and rise in welfare expenses is making it tough for governments to pump prime economies.
- Geo-political tensions have impacted trade flows and export demand.
- This has resulted in asset price bubbles which will keep on getting bigger and bigger. Real economy will continue to sputter and suffer but the tail (financial economy) will continue to wag the dog (real economy).
Other reason why Markets are being inflated is the pure fact that too many joblessness has lured many people towards Investments and Trading for income since March. And all they have seen is Green. Once economy resumes, it's likely that they will shift to their real businesses showing the true valuations of economy.
Many Smallcaps with High debt have been able to generate great returns in last few months due to the moritorium period and benefit of not having to pay any interest for 1 year. Yes, it will show good results in next quarter but the main question is till when? Sooner or later their balance sheet will again get stretched in such a way that either companies will have to liquidate or the main sufferer will be the Banking System. Either way, the outcome will be something which current market isn't anticipating.
*What could spoil the party?*
When investors realize that Central Bank Balance Sheets have been so perversely bloated and governments have so grossly abused fiscal boosters that debt/GDP ratios have become unsustainable.
Also, US elections in coming months will be the Biggest Event. Biden, the opponent of Trump(Republican) are of the mindset totally opposite then what Trump is (giving away free money to hide the real economy). Incase he is being favorite, the party may end in notime.
Till that time equity markets will continue to party.
*Prabhudas Lilladher*
Surat-Valsad-Mumbai.