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Comment: Runaway inflation the risk to watch

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13.06.2018

A number of analysts think that global equities are significantly overvalued. Some even fear an impending stock market crash. It is easy to appreciate why this might be.

Over recent years, the world's central banks have poured money into the system in an effort to boost aggregate demand and hence keep the economy growing after the financial crisis of 2007 to 2009 and the subsequent Great Recession.

It was explicitly envisaged that this would work through boosting asset prices. Now this policy is coming to an end.

The US Fed some time ago stopped buying more bonds and is allowing its holdings gradually to run down as bonds mature, while the Bank of England has stopped increasing its bond holdings.

The ECB is still buying bonds but it is widely expected to stop doing so by January.

The other element of monetary policy, namely ultra-low official interest rates, has already turned in an unhelpful direction in the US and the UK.

The ECB may wait until late next year before raising rates. But higher rates are on the way in the eurozone as well.

These headwinds for the market might not matter much if valuations looked reasonable.

But according to some yardsticks they look anything but. The most widely watched bearish indicator is the so-called "CAPE", standing for the "cyclically adjusted price-earnings ratio".

This measure has been advocated and popularised by the Nobel Prize winning economist, Robert Shiller.

It is different........

© New Zealand Herald