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The Market Dogs That Didn’t Bark

Did February’s equity-price reversal mark the end of the bull market, or was it just a temporary correction? In addressing this question, one must look not just at the stock market, but also at oil prices, long-term US interest rates, and currencies.

LONDON – Three months ago, I argued that rising stock markets around the world were a consequence of improving economic conditions, not a sign of “irrational exuberance.” Since that commentary was published, share prices accelerated upward, and some “irrational exuberance” did start to appear, leading to a sharp fall in early February. Although most stock markets are still well above their levels of last November, the question lingers: Did February’s reversal mark the end of the bull market, or was it just a temporary correction?

The strongest evidence, as Sherlock Holmes might have remarked, comes from the dog that didn’t bark. More precisely, it comes from three vehement guard dogs – oil prices, long-term US interest rates, and currencies – that slept peacefully through the commotion on Wall Street.

Why this evidence is so significant becomes clear when we recognize that the main risks to the global economy are now completely different from the “New Normal” of secular stagnation, “low-flation,” recession, and European instability that markets have spent the past decade worrying about. The real threats to global expansion and asset prices now come from accelerating inflation, unsustainably rapid growth, and political mismanagement in the United States.

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