Global Markets' Time Factor.

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In recent months, the dichotomy between booming financial markets, on theone hand, and sluggish economies and dysfunctional politics, on the other, hasloomed large. Yet insufficient attention is being devoted to a critical factor– time, and who controls it – that could well mean the difference between anorderly global resolution of today’s growing inconsistencies and a return to amore troubled phase.

Markets have been understandably buoyant in the first quarter of 2013.Most economic data confirm that, after the trauma caused by the globalfinancial crisis, the United States’ economy is healing, and doing so in anaccelerated fashion.

The sequence is now well established. It started with large multinationalcompanies, which are on as solid a financial footing as I can remember. Smallerfirms are gradually recuperating;banks have rebuilt their capital cushions and reduced their dubious assets; thehousing sector has stabilized; and a growing number of households arereestablishing healthier balance sheets, especially as employment graduallypicks up.

This private-sector recovery is helping government finances. The US budgetdeficit has been on a downward trend for now, helped by both higherrevenues and lower pressure on spending (for example, payments to theunemployed have fallen as joblessness has declined).

The healing process is also evident in Europe, though, unfortunately, itis effectively limited only to sovereign-bond markets. The real economy remainsunder enormous pressure in several countries, as economies contract andunemployment remains alarmingly high.

After flirting with disaster last July, interest-rate spreads for eurozonebonds have generally been subdued, andfinancial segmentation has been slowly reversed (that is, at least beforeEuropean officials embarkedon the controversial path of trying to impose losses on guaranteed bankdeposits in Cyprus). Moreover, as Ireland’s highly successful

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关键词：Markets factor Global market marke theone first difference resolution attention

In recent months, the dichotomy between boomingfinancial markets, on the one hand, and sluggish economies and dysfunctionalpolitics, on the other, has loomed large.Yet insufficient attention is being devoted to acritical factor – time, and who controls it – that could well mean thedifference between an orderly global resolution of today’s growinginconsistencies and a return to a more troubled phase.
This private-sector recovery is helping governmentfinances. The US budget deficit has been on a downward trend for now, helped by both higherrevenues and lower pressure on spending (for example, payments to theunemployed have fallen as joblessness has declined).

The impact on markets of these trends has been turbocharged by centralbanks, which are risk markets’ best friends.This is most evident in the US, where markets love theFederal Reserve’s trifecta of near-zero policy interest rates (negative in realterms), aggressive forward policy guidance, and asset purchases – all of whichpush investors to take more risk. Markets also welcome the fact that the Fed’shyperactive experimentation is forcing other central banks around the world topursue more expansionary policies.

Understandably, investors have interpreted all of thisas a green light to take more risk.


The excitement is not anxiety-free, however, andrightly so. Investors worry about the longer-term consequences of politicaldysfunction, another year of European economic contraction, disastrously highunemployment, unprecedented – and thus untested – central bank policies,and increasing global tensions.

This mix of excitement and anxiety is, in fact, a sign of the loomingcrossroads that faces investors. One road, involving a relatively orderly handoff frompolicy-assisted recovery to self-sustaining growth, offers the possibility ofeven greater financial rewards, as rapidly improving economic and politicalconditions validate current artificial pricing and drive it higher.

The other road is a lot less attractive. With insufficient endogenoushealing and no economic escape velocity, the effectiveness of central banks’policies wanes and political dysfunction increases, leading to financiallosses, volatility spikes, and huge risk-management challenges.

In these circumstances, timing may not be everything, but it may prove tobe a key determinant of the probabilities. If the journey to the crossroads isaccelerated by a large geopolitical shock (originating in, say, the Middle Eastor North Korea) and/or a serious political breakdown in Europe (for example, ameltdown in Cyprus or prolonged political paralysis in Italy), the probabilityof taking the adverse path rises to an uncomfortably high level. If, however,central banks can contain domestic and global inconsistencies long enough, thecombination of endogenous healing and eventual political progress wouldsignificantly improve the probability distribution.