The current short-term trends

i) extreme monetary policy and excess liquidity since the GFC (starting 2007) has created massive distortions in asset prices (financial assets appreciate strongly while the real economy prices, like wages, are depressed). This has produced greater inequality.  However the central banks have eased the qualitative easing (starting in 2018) which is adding to financial markets' volatility in the short term. The low interest rates coupled with US Trump-inspired fiscal boost, has dramatically increased the value of the growth companies. This could pose a problem with a greater risk of a significant correction.

"...It is important to recognise that volatility in share prices......in many cases it is not rooted in the fundamentals of the company. Rather, much of it is noise generated by trend of following algos and quant strategies that are distorting the market moves..."
Hamish Tadgell as quoted by Debra Cleveland 2019

"...past cycles and history are littered with examples of companies that have performed strongly, corrected, looked attractive, recovered some performance, but go on to flame out as true quality (or, more to the point, low quality of the businesses materialise and momentum turns..."
Hamish Tadgell as quoted by Debra Cleveland 2019

ii) the changing market cycle (the current cycle is atypical for a couple of reasons, ie its length and equity market returns have been strong despite weaker average economic growth)

iii) political and social changes like rising popularism (dissatisfaction with the current political elites and uneven distribution of the benefits from globalisation, technological changes, multilateralism, etc).

Post GFC, populism is on the rise and expressed in numerous ways, eg

- opposition to immigration, especially to African and Arab refugees arriving in developed countries like in Europe
- hostility to Muslim fundamentalists and extremists
- the results of the BREXIT referendum in UK
- Donald Trump's US presidential victory in 2016 (his main campaign slogan "Make America Great Again")
- trade war between China and USA and its allies
- disenchantment with globalisation
- rise of white supremacists
- nervous cultural conservatives who
"...feel that society is changing too quickly on issues such as black and gay rights, transgender toilets, immigration and political correctness..."
Andrew Clark, 2017

Furthermore,
"...heavy government and personal debt, added to greater human longevity, also means relatively less spending on social services and tight budgets in retirement. All of this - along with technological disruption to job markets - helps explain the rise of populist politics across the West..."

Pippa Malmgren as quoted by Mark Mulligan, 2017

Populism is based upon the majority of the population perceiving that they are not reaping their fair share of the benefits that the elites are obtaining from new technology. With the disappearance of many traditional manufacturing jobs (blue-collar workers), many workers' expertise is irrelevant in the new technological age of the Internet, AI, digitalisation, etc. The benefits of the new technology are not being shared equally; many people fear they are missing out.

There is rising inequality:
"...primarily in the United States, but also certain areas in Europe, a growing part of the industrial workforce has essentially not been able to adjust to global competition, to the increase in technology and the displacement by new technology..."
Raghuram Rajan as quoted by Patrick Commins, 2017

iv) "unknown knowns" events (an unlikely but predictable event occurs like Covid-19 pandemic of 2020, ie it is known that a pandemic will occur but when is unknown)

 

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