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Conclusion: The ultimate bubble?

Is the post-Goldilocks crash inevitable? Charles Dumas looks at an alternative scenario, where the bubble refuses to burst.

World Economic Forum special report: Contents

If the savings-glut chickens are finally coming home to roost, why no market crash? Some possibilities:

  • The slowdown is not a crash – non-housing US demand is only likely to give way gradually, probably under Fed pressure;

  • And the Eurasian savings glut is growing;

  • Whatever central banks may do, the two preceding points mean bond yields are being driven down;

  • Hedge funds and private equity have grown massively on the basis of leveraged booms – they are not about to roll over and play dead.

When would we admit we were wrong? If US GDP growth is at 3% (or more) from 2006 Q4 to 2008 Q4 and inflation eases back on a core basis to 2% during 2008, we would be wrong. Bonds would love it. So would stocks. With the savings glut as the base-load of liquidity and the leverage of the financial industry in full swing, stocks would enjoy an ultimate boom, as would high-end plays like art and London real estate.

A key issue is business behaviour, given the strength of profits and balance sheets. At the moment, while bank lending to US households is growing at about 5%, business loans (including all primary mortgages) are growing at 15%.

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