Icarus trade continues, with the next global crisis further away than you think

Good to see Ambrose Evans-Pritchard weighing in on the (absence of) the next global financial crisis:

….If corporation tax drops to 25 per cent and incentives are offered to repatriate up to $US4 trillion of US corporate cash held offshore – tinder for stock buy-backs – you might see the sharemarket’s price earnings ratio breaking the all-time high of the dotcom boom.

Whether any of this stimulus is wise is another matter. The Bank for International Settlements chides central banks for making a Faustian Pact long ago, rescuing markets every time there is trouble but letting asset bubbles run unchecked in the good times.

They have created “intertemporal” imbalances that require ever lower real interest rates with each cycle. The deformity is worse today than before the Lehman crisis after eight years of emergency stimulus.

The global debt ratio is 40 percentage points higher at 327 per cent of GDP. Nobody knows what the sensitivity may be to even a modest degree of tightening.

Yet if the Sword of Damocles hangs ever over us, that does not mean it is about to fall. My humbling discovery after decades of amateur observation is that such episodes take longer to play out than you imagine.

I was convinced that the global financial system was spiralling into crisis at least 18 months before Fannie Mae, Freddie Mac, and Lehman Brothers collapsed over those terrifying weeks of late 2008.

That was a bad call. Even disasters have their proper sequencing.

Source: Icarus trade continues, with the next global crisis further away than you think

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