In 2001, indicators showed that GDP-relative value of the U.S stock market was twice that of its historical level. However, its Market-Cap-to-GDP sharply decreased with 2008 financial crisis. Today, cumulative market capitalization of all stocks relative to its GDP is again twice that of its historical level and greater than 2008 pre-financial crisis which means the U.S stock market is currently overvalued. In other words, US economy may face another bottleneck again. Not soon but not far.
My observations and forecasts are not obviously based on a couple of parameters. I am also taking over-protectionism into consideration in terms of its potentials damages to the US economy and companies’ profitability.
Fed Chair Jerome Powell must be thinking the same thing as he said the other day that Fed is hearing a ‘rising chorus of concerns’ from companies. He also added that a more protectionist world is going to be bad for the US economy as well as for the global economy.
“Fed faces two major risks. One of them ismoving too slowly and risking a destabilizing overheating”, he said. This statement clearly shows that the Fed still sees gradual rates hikes as the best path. In his report, however, Powell did not overlook the risk I mentioned earlier, “Fed would not hesitate to react to a major stock market correction”. This pretty much sums it up all.
Although nominated by Trump, the Fed Chair has so far proved that he will continue to act upon reasonable judgments. So, it looks like the Fed will maintain its present monetary policies and not stray from its intended path of gradually increasing interest rates to the target inflation, if US economy or US markets keep working in total harmony.
I must say that this decision, however, may lead to an increase in foreign currency funding costs and further problems in funding in general.
“Exchange rates dropped yesterday. Why?”
Rumour has it that Turkey and Germany are about to strike a deal for fresh money flow into Turkey. The details, however, remain unknown.
I expect this deal to bring great ease to markets as even the rumour of it has already created positive vibes. Of course, we will have to wait and see the result of bilateral talks. For sure, Turkey wants to manage this fund flow without attracting too much media coverage. However, in addition to the terms and conditions that it stipulates, I can guess that Germany does not want to miss the opportunity to give the following message: “You’ve been bragging too much. But this time, things will not be so easy for you.”