As with any drug addiction, the first step is admitting you have a problem (or waking up naked in Glasgow train station). It seems HSBC - among a number of other sell-side strategists - are starting to wake up to their undying 'faith' and 'hope' that, based on the world's addiction to free money, there will be a return to the old normal status quo. As HSBC's Chief economist Steophen King notes, "there is an optimism bias, largely reflecting an attachment to pre-crisis growth trends which, post-crisis, have mostly remained out of reach," and they are finally facing up to the fact that "the world economy has succumbed to a lower structural rate of economic growth." But it is RBS that is waving the red flag as they warn of a "sense that this nervous stasis is dulling our perceptions about risk... it feels like 2007 all over again."
As Bloomberg reports, [analysts] say they’ve overestimated global growth prospects for each of the last three years by being too upbeat after the 2008 financial crisis. They’re now taking corrective action.
“There is an optimism bias, largely reflecting an attachment to pre-crisis growth trends which, post-crisis, have mostly remained out of reach,” according to a report published last week by the team led by Stephen King, HSBC’s global head of economics and asset-allocation research. “Our latest projections are consistent with this sense of ennui.”
HSBC hasn’t been alone.
It was all supposed to be so easy...
The list goes on: Printing money was supposed to lead to higher inflation, yet hasn’t. A run-up in equity prices has failed to ignite economic activity, and house prices are booming even with weak inflation.
But it hasn't worked out that way.
Behind the errors lay a reliance on “simple rules of thumb,” say the London-based King and his colleagues. Economists are suffering from a bias toward optimism that suggests economic drivers are the same now as before 2008.
Businesses are also signaling a permanent downshift in price expectations by restraining investment despite cash surpluses and cheap financing costs, said HSBC.
As they conclude...
“Either the post-crisis financial hangover is longer-lasting than the majority of economists expected, or instead the world economy has succumbed to a lower structural rate of economic growth,” they said.
But if economists are waking up to the new normal, strategists are also starting to get nervous..
“Difficult to see any risks that lie just ahead” is “the way markets feel right now with spreads tight, rates low and volatility at or near record lows,” RBS strategist Bill O’Donnell says in note.
“Sense that this nervous stasis, if you may call it that, is dulling our perceptions about risk as cash-laden global investors pile into rates and equity markets with little apparent heed paid to things like RISK-adjusted returns”
“Feels like 2007 all over again and no wonder many investors have simply chosen to disengage from markets as our slipping turnover reflects”
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So who is left to tell you to buy? CNBC? Cramer? Your friendly locall asset-gatherer? The bright-white-shiny-smile-wearing long-only equity fuind manager on TV?