Recently, economists have made some convincing arguments as to why stock markets supposedly take a setback and yet continue to rise.
Even in Japan, a country mired in recession, stocks are trading at levels not seen in a long time.
Some would say that this all comes down to an overly optimistic attitude; For example, in the case of the US, the uptrends in the S&P 500, Nasdaq, etc. are due to an expected interest rate cut.
Meanwhile, the good momentum in Japan is explained by the continuity of ultra-loose monetary policy and the regulator's reluctance to end Abenomics.
But here's the catch: everyone seems to be turning a blind eye to the mountain of problems that are piling up. It’s not just about regional banks and commercial real estate.
We're talking about huge debt bubbles that will never be paid off. Another risk is increasing tensions, not only in armed conflicts but also in trade disputes.
For example, US presidential candidate Donald Trump is waiving tariffs against European and Chinese products. Obviously, such protectionism will not be conducive to economic growth.
Why else are stocks exploding?
First, investors are afraid of missing out on this historic rally. Everything is going well now, so why not keep the party going?
Added to this is the feeling that for many, stocks are not just about making money; They are a kind of shield against geopolitical uncertainties and inflation.
And the bigger the company, the more trust people seem to have in it. This has caused everyone to forget about things like fair value.
The third factor is in the mind: Thanks to the Federal Reserve's bailout of regional banks last year, many people are convinced that Big Brother will come to the rescue if something goes wrong.
But here's the risky part: spending all the ammunition now means regulators won't have much time to intervene later (one only has to look at the national debt and its servicing costs to understand why).
So when will a market crash become a reality?
For the tide to turn, one of two things must happen: either the money flooding the market dries up (which seems unlikely given the $6 trillion in money markets), or curveballs start coming our way.
For example, if US regional banks fail left and right, it will trigger a domino effect that will eventually spread to Europe and even Asia. In order for this to succeed, government support would have to be eliminated.
What we see in the market does not reflect the state of the economy. And the worst thing is that the positivity is based less on hope for a bright future and more on faith in the help of regulators.
But this is a slow-ticking time bomb that will explode at some point, and the longer we wait, the greater the damage will be.
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