Market turmoil: A blessing in disguise?

Posted: October 16, 2014 in economy
Tags: , ,

WHEN Winston Churchill, having led Britain to victory in the second world war, was defeated in the 1945 election, his wife Clementine remarked that it might be “a blessing in disguise”. If so, the great man replied grumpily, it was “very well disguised.”Could the same be true of yesterday’s market sell-off? Some investors were arguing the case yesterday. One tweeted thatFalling yields and oil price (are) far more of a stimulus than recent data is negative. Expect growth momentum to improve.Certainly, lower oil prices are a tax cut for western consumers. Although, of course, the result is an income loss for oil producers, the marginal propensity to consume of consumers (as it were) is higher and this helps demand.  Rising oil prices have been a harbinger of recession, whether in 1973-1974, 1979-1980 or 2007. Lower government bond yields are a help, to the extent that they also bring down corporate borrowing costs. This effect is limited, however, by a rise in spreads; high-yield US bonds now yield 500 basis points above Treasuries of the same maturity or 6.3%. And of course, if companies are worried about the stregnth of the global economy, they won’t borrow, whatever the rate level (as the Japanese example illustrates).In part, this may be a question of lags. To the extent that falling bond yields and lower oil prices reflect concerns about global growth, how long will …

via Economic Crisis


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