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A World Setting New Records

A World Setting New Records

The Dutch have their share of peculiarities, one of which is the Spring Ritual.

Although not officially named or recognized as such, its very informality and universality is all the more charming.

The Dutch climate knows long spells of cloudy, inclement weather, especially in autumn and winter. Comes the Spring, and the first day on which the sun really shows itself, and it invites a massive outburst of joy, as offices are abandoned at midday and afternoon for a spot in the sun, soaking up as much as can be had after months of grim abstinence.

This came to mind as the world roared into March and then April 2014, with equity markets all guns blazing. Was it something in the water, or in the air, that infected so many in so many time zones thus?

The global beat on this equity slave galley is of course kept in New York. But it seemed there were a lot of willing bodies out there wanting to joyfully keep to its demanding rhythms.

And though local conditions in specific cases were never entirely ignored, it still seemed as if the American drummer set the scene, choose the themes, and kept the pace.

Central in focus were the US economy and its steady gradual recovery, the Fed policy normalisation and its well flagged unthreatening schedule of bond purchase tapering and interest rate hiking these next five years, the Chinese adjustment and growth stabilisation while exposing private finances more to market discipline, with cameo roles for a slowly recovering Europe and its endlessly accommodative ECB, aggressively reforming Japan, with little thought expended on Ukraine troubles and Russian superpower megalomania.

After many years of varying crises and deep soul-searching, global markets showed progressive evidence of downside uncertainty steadily fading and upside confidence building.

With an awful lot of money still on the sidelines after years of worrying, the shift in sentiment seemed to be gathering strength even as the numbers blazed "steady, steady, steady". You don't need acceleration to set markets alight. After years of intimidation and fearing reversals, the simple observation of believable steadiness, and where it could lead, so long in doubt (and still so for many trailing behind the main body) was apparently enough to send a shudder through the ranks. This time not of fear but of pleasant anticipation.

Besides, too many remained glued to bonds that could face haircuts as the global situation finally stabilizes, meaning more resource utilization, somewhat more inflation, and higher nominal interest rates, each in turn normalising to levels historically associated with more balanced performance.

With this recognition by now more widespread, with growth performance more steadily pointing the way for policy, the equity pull factor may have been as strong as the bond push factor, at least in places.

Longevity? Potentially historically long, as the growth recovery remains modest, the resource slack take up very slow, inflation undershooting. Only asset markets are bubbly, and then only equity, and risk generally.

For some this is already a reason to shoot the happy messenger on sight. This, though, may be a tad premature. Policy makers appear united in giving free rein to this happy Spring phenomenon a little longer.

The Dutch know instinctively that on Spring Day it isn't clever to play the heavy with absconding staff. They will be back, and work harder than ever. It is called morale and all troops need it to win wars.

The American, European and Japanese economic recoveries are potentially not even at half-life since 2009, given their resource slack and modest speeds. Economic overheating may therefore not become a feature this side of 2020.

Indeed, a Financial Times article this morning questions whether the economic normalisation will progress fast enough for real rates in the leading countries to normalise back to pre-crisis levels soon. It suggests an even longer playout to pre-crisis normality.

As to asset markets, bonds remain at risk of rates repricing higher, property worldwide will take time (though hot in global hotspots) and there is in any case global policy normalisation to be digested, meaning short rates rising by 3%-4% globally and long rates by at least 2%-3% (though qualifications are noted).

That is already a lot of headwind build into the cake the next few years, though it won't prevent global equity markets celebrating the coming of Spring after the most foul weather of a lifetime, potentially taking off the remainder of the decade doing so.

Joy to the World. Until the next global check, probably again financial in nature.