Tribune. It is an understatement to say that the atmosphere is no longer good between Washington and Beijing. Since the stormy Anchorage meeting on March 18, things have seemed crystal clear. Now is the time for angry subjects and the last NATO summit on June 14 only heightened tensions. Joe Biden could nevertheless be forced to return in the coming months to more cooperation with the Chinese government. In question, the proven danger of a financial crisis on the other side of the Atlantic.
The ratio between market capitalization and gross domestic product (GDP) of the United States, a measurement instrument developed by Warren Buffett in 2001 during the collapse of the Nasdaq, has just crossed a critical threshold. At the end of June, it stood at 130%. In the summer of 2007, when the subprime broke, the total value of financial instruments on Wall Street accounted for 137% of US GDP.
Of course, an indicator considered in isolation never makes it possible to indisputably discern potential market developments, but we will not retort too quickly that “This time, the context is different”. It is difficult to argue that investors will necessarily emerge from the bubble in time to reallocate their portfolios since, precisely, alternatives are lacking.
The danger of overpricing digital titles
In recent years, prices have mainly been driven upwards due to the attractiveness of stocks in the digital industry. From this point of view, the drastic drop in rates decided upon following the pandemic has only whetted this appetite. When the overvaluation of this category of securities becomes untenable, the goose that lays the golden eggs will be dead and it will be difficult to move towards traditional values.
This is because the shares of traditional sectors have already largely integrated the rebound of 2021 after having, after all, suffered little in 2020. At the time, the unconventional action of the US Federal Reserve had prevented them from experiencing a plunge. too marked.
This is undoubtedly why, in its report on financial stability of May, the American central bank did not go there by four ways while being astonished at the “High level of certain assets compared to historical standards” before specifying that “In this context, prices may be vulnerable in the event of a drop in risk appetite”. It could not be more explicit. In short, the question is ultimately not whether a financial explosion will hit the United States, but more when it occurs. Given the current level of its nominal rates, the Fed will probably just have to head into negative territory. The Biden administration’s room for maneuver vis-à-vis Beijing will then be significantly reduced.
You have 29.94% of this article left to read. The rest is for subscribers only.
