The recent market sell-off tells me that the global liquidity contraction has begun, driven by a rising cost of capital, falling risk appetite and a reversal of carry trades. This will eventually cause a slowdown in world economic growth some time next year.
The huge blowout in high-risk debt will not be a one-way road to hell. Equity markets are due for a sigh of relief and could well rally back to their highs or higher before the next round of liquidity tightening takes them lower.
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