For the market neutral, or negative, the story of Saul on the road to Damascus may be beginning to resonate. Whilst perhaps not yet struck blind by a bolt from the blue and converted, doubters can not help but be surprised by the strength in equity markets.

The economic story supporting markets is foremost about ample liquidity. Secondly it concerns the rise of Asia as an aggregate industrial power capable of developing internal domestic demand. Lastly there are the commodity exporters. Whether this mix is defined as a “new paradigm” as advertised or as a new twist to an old economic story does not really matter. It is what it is: generous liquidity -> global growth -> low inflation -> low rates -> generous liquidity.

How long that circle will continue is not knowable. However, that most large economies are peaking/have peaked is clear (Julius Bär's latest thinking on that illustrated below). On the other hand, whether 2007 will be a mid-cycle correction rather than a recession is unfathomable.

Exhibit 1: Image courtesy Julius Bär. Sign indicates shorter-term outlook.

Consensus, though, is for a mid-cycle correction and equities are cheerfully, and somewhat maniacally, pricing this in. Equities also appear set to enjoy some real-time support from seasonal strength through to end Q1 2007. In this situation eager "complacency buying" may prove to be the largest impoverishing threat, especially for retail investors.

Fetch me Ananias.

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  1. RJH Adams // 11/21/2006 10:12:00 AM

    When I said fetch me Ananias, I did not mean this one.

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