The jumbo rally in risk assets continues. New post-crisis highs in equity and commodity prices are reached every week. It’s blue skies ahead. But I remain in the camp of the worried. This rally is not sustainable. It is driven by expectations of a quick and durable recovery in economic growth and fuelled by government support for asset prices and leverage.
The rally in risk assets is unsustainable because the markets’ view of a V-shaped economic recovery will be disappointed. All the economic growth we are seeing is a supply-side adjustment to boost production to meet low levels of final demand, which is no longer falling off a cliff.
The markets are working on the assumption of a rapid return to business as usual. However, the causes of the credit crisis should tell us that we cannot return to the old ways. The pre-crisis bubble economy was...
