Asset Prices & Rebalancing
These aren’t isolated data points, they are part of trend that has been in place since the Spring.
The widely respected National Institute of Economic and Social Research yesterday said:
Our monthly estimates of GDP suggest that output was unchanged in the quarter to September as compared to the second calendar quarter of the year. Industrial production was much weaker than we expected in August. In part this was because of reduced activity in the oil industry which is known to be erratic. But the manufacturing sector showed further weakness as well.
In other words, they think the recession isn’t yet over. They also included this excellent chart:
For all the talk of green shoots, we still have rising unemployment and collapsing investment levels. What little ‘growth’ we are seeing is the result of companies rebuilding inventories (which will be temporary in the absence of private sector final demand) and government spending.
And yet despite this, asset prices are rising. House prices are up 3 months in a row. The FTSE 100 has rallied a massive 46% since March.
Now as someone who works in fund management, maybe I should just keep quiet and be thankful. Rising asset prices are good for my clients and good for me.
But I do have to question what is causing this? Irrational exuberance on the likely strength of any recovery? A side effect of quantitative easing? Future inflation worries? An excess of global liquidity, which is simply being used to purchase assets rather than help the real economy?
The economy needs to be rebalanced. But not in way that favours holders of assets over the real economy. This is raising serious questions about the manner in QE is pursued, something I shall return to in a further post this week.