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.
Most of my gainfully employed acquaintances working for big institutions on the sell side (who are 30 to 40 years younger than I am and a lot more intelligent and technically qualified to do the job) hold the view that there will be a rapid return of normal risk appetite in the autumn because the global economy is so powerful. So the party is paused like an in-flight movie, but not over – just a loo break.
I don’t believe this. The financial economy is now so big in relation to the real economy that it can be the locomotive of the train rather than a wagon.