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Against the tide: Sweet or sour in the Year of the Pig?

Nothing is more likely to cause instability than a long period of stability. And excessive growth of credit and liquidity is a clear warning sign of crashes to come, probably within the next year.

On February 18 the Chinese Year of the Pig begins. I am counselled by my Chinese friends to undertake nothing risky during the upcoming porcine year. It might easily turn from sweet to sour.

As I write, the global equity rally that began last summer is still motoring along. Last May, the world got a whiff of the sort of damage that tightening liquidity could do and didn’t like it. Monetary conditions have been easing ever since, particularly in the US.

It is a challenge to see how the rally will end. Long-term interest rates remain very low. Published inflation – but not asset price inflation – is declining. The Federal Reserve is believed to be more likely to ease than to tighten.

Global economies are in the cool but seductive platinum blonde phase, with lower US growth being offset by stronger European and (hoped for) Japanese performance. China is having its statistical soft landing as officials rush to report numbers to fit the new mantra of “less growth good, more growth bad” by putting the right numbers in the right boxes.

Geopolitics looks quiet, bar the occasional terrorist attack. Kim Jong Il and Iranian President Mahmoud Ahmadinejad have increased their power but the occasion when they might choose to test it is far enough off for markets to dream on.

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