Our investments have continued to perform well in the second quarter. Global stock market indices are now between 10 % to 25 % higher than at the outbreak of the pandemic in January 2020. This might trick us into thinking the pandemic has not caused any lasting damage to the economy and – as the crisis continues to subside – everything looks better than before. But all of us who do not go through the world with closed eyes know that this in no way corresponds to reality.
So why are financial markets in such a bullish mood? The answer is mainly to be found in the central banks, which are providing massive liquidity to support the economy. The message from central bankers is that it will take quite a while for normality to return. Western economies are still so weakened by the pandemic that they need massive state support. While it is true that inflation rates are rising at the moment, this is only a “temporary” price spike, according to Christine Lagarde, President of the European Central Bank (ECB). In the not-too-distant future, inflationary pressure will ease off again of its own accord. Her American colleague Jerome Powell, Chairman of the Federal Reserve Bank (Fed) holds a similar view: “We’re not out of the woods yet.” First we need to wait and see how many new jobs could be created – and also live with a temporary spike in inflation rates. Both experts send a clear message: it is essential not to withdraw economic support too soon. Central banks and finance ministers must continue to pump trillions of euros and dollars into the economy.
It is only common sense, however, that such ballooning of central bank funds and government borrowing is absolutely ruinous and cannot be sustained in the long run – there must be a reversal at some point. This is what investors currently fear most, as it would drive interest rates higher and trigger a correction (or even crash) in financial markets. All eyes and ears are therefore focused on any hint of change in central banks’ monetary policy.