Eurozone growth is up across the board, earnings season in the US was impressive, the UK’s FTSE100 has had a stellar year despite Brexit worries, and even Greece’s economic woes look far less terrifying.
Everything looks better, doesn’t it? Aren’t we through the worst of the post-crisis economic downturn, so now we have less to worry about? Jean-Claude Trichet, the former President of the ECB (pictured), doesn’t entirely think so.
Speaking to CNBC, Trichet said, “Despite the fact that real growth is active, I wouldn’t say buoyant, but very satisfactory, we have some indicators on global leverage that are not reassuring.” Referring to massive debt levels across the world, he added, “We are now at a level (of debt) which is higher than immediately before the financial crisis, so there’s no time for complacency.”
The International Monetary Fund has repeatedly warned about global debt levels. The IMF’s deputy managing director David Lipton said, “We are seeing some greater leverage in the corporate world, in some countries for households, so that rising indebtedness and that increase in market risk really is something policymakers should keep an eye on.” Last year, global debt hit a record high of $152 trillion, while the IMF warned it added major risks to recovery.
Even China, which has relied heavily on debt to boost their economy in the past, is slowing down borrowing in order to reduce risk. Yesterday they pulled a $4.6 billion subway project in Inner Mongolia.
Additionally, Jean-Claude Trichet pointed out that a very long period of ultra low interest rates, coupled with quantitative easing programmes carried out by central banks, has allowed for the prices of financial assets like stocks to rise rapidly. This presents the risk of major bubbles in financial markets, which some would argue are already present.
Indeed, surveys indicate that a large number of investors think stock markets are overvalued, though they are still choosing to take on high levels of risk. Bank of America Merill Lynch’s new fund-manager survey (which includes over 200 people who manage $610 billion) shows a record number of survey respondents are taking higher-than-normal risk, at a time when US stocks are close to their highest valuations in history. Overconfidence here could be dangerous. The data indicates investors are feeling emboldened at a time when they should be more cautious.
Regardless, US markets are likely to rise further, pushing up stock prices. UBS thinks tax cuts in the US could boost S&P500 earnings per share by at least 6.5% in 2018, with telecom and financials predicted to be the biggest winning sectors. They noted that the S&P500 rallied by over 40% after the 1986 corporate tax cut under Ronald Reagan, so this seems likely.