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Alasdair Macleod: Surprises in store

Section: Daily Dispatches

By Alasdair Macleod, St. Helier, Jersey, Channel Islands
Thursday, January 28, 2016

From the peaks of last year stock indices in the major markets have fallen 10-20%, give or take. On their own, these falls could be read as healthy corrections in an ongoing bull market, and doubtless there are investors hanging on to their investments in the hope that this is true.

The conditions that have led to the fall in equities are tied up in the realization that global economic activity has contracted sharply. This is now reflected in the performance of medium and long-dated US Treasury bonds, where yields have declined, despite a rise in the Fed Funds Rate. The problem equity markets face is not just a reaction to growing evidence of recession, it is that the normal Fed solution, lower interest rates, is exhausted. The Fed's put option is now being questioned.

Far from this being an equity correction in the early stages of a credit cycle, which is what the small step towards normalization of US interest rates would have had us believe, the evidence points to a developing debt crisis, whose future course we can now tentatively map, though there are important differences to observe compared with a normal credit cycle. ...

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