Exuberance of the markets

The cycle pleases us with its quiet strength: growth accelerates everywhere, while inflation, which is generally a symptom of cyclical excesses, remains surprisingly wise, thus removing the fears of an impending turnaround. However, if inflation has deserted the real sphere, the stakes have shifted to the financial sphere with a runaway inflation of asset prices, what to fear a financial crash that would not be free of collateral damage on the real economy .

In the ascending phase of the cycle where optimism reigns as king, the financial euphoria forces agents to acquire real or financial assets to the point of generating a cumulative and endogenous increase in prices, often completely disconnected from reality. At the same time, vigilance in terms of risk assessment is weakening and betting is becoming more and more daring to feed ever more profitability. It is in essence when everything seems to be going well (the paradox of Minsky's tranquility) that imbalances are formed with asset bubbles, swollen debts and greater complacency with regard to risks. particularly vulnerable markets in the event of a reversal of expectations.

Central banks are once again in the dock to follow too scrupulously their nominal anchoring mandate in a low and stable inflation regime, and let interest rates too low for too long, which in a context abundant liquidity, feeds the financial excesses. In particular, the quantitative easing policies, these unconventional measures set up during the crisis, and even beyond, to fight against the risk of deflation, led central banks to buy out debt securities, generally bonds, public or private but also, in the United States, securities backed by real estate assets. According to data from the Bank for International Settlements (BIS), the aggregate balance sheet of the Fed, the ECB and the BoJ has thus fallen by more than $ 8,300 billion since 2008, a massive and unprecedented increase currency put into circulation. This captive demand for good quality and safe securities has inflated their value with a corresponding decline in risk-free rates, a trend amplified by excess global savings in search of safe investments. The financial players who sold these low-yielding assets to central banks ended up with cash to reinvest in search of greater profitability. This liquidity, released in this way, has pushed market segments, which are always more numerous, to overheating, as evidenced by the soaring stock market indexes (especially in the United States) and the compression of risk premiums on emerging markets. diversification assets, such as corporate and emerging-market bonds. This asset price inflation seems to be totally disconnected from the performance of the real economy. As the BIS notes, liquidity grew four times faster than the aggregate GDP of the three major economies, which grew over the same period by only $ 2 trillion, generating unprecedented distortions in market prices.

The financial cycle seems to have thus taken the ascendancy on the actual cycle of activity while interacting with the latter, in view of the induced wealth effects which push the agents to spend, or even to become more indebted thanks to the revaluation of the assets. used as security. As long as the central banks withdraw the money infusion with counted steps, the weaning could be smooth, with a very gradual rise in the yields of safe assets and a slow re-pricing of risks. However, an accident quickly happened: whatever the catalyst, a monetary policy error or a geopolitical earthquake, a sudden risk appreciation or a rapid and unanticipated rise in rates is likely to trigger a wave of sales and market correction. In the face of risks that are assessed incorrectly and therefore poorly paid, this return of balance may even be beneficial if it converges towards a new equilibrium more in line with economic fundamentals. However, markets rarely stop at equilibrium with risk aversion surges that lead to overreaction phenomena when collective opinion is swept away by a wave of exaggerated pessimism and all threats, even virtual, become a pretext to sell, all the investors rushing then to the exit to limit the losses. This pack hunting destroys liquidity with sell-offs that, without purchasing counterparties, lower asset prices like stones, well beyond the necessary correction of excess valuations. The resilience of the global economy to such a financial shock has yet to be proven, with room for maneuver, budgetary and monetary, now reduced but, more reassuringly, stronger post-crisis banking systems that should normally limit systemic contagion effects transiting through this channel.