What are the problems with Goldilocks?
New Year’s Eve, the world very much deployed on the basis that Goldilocks would indeed find her way through the woods.
The prevailing belief is that this year will see significant falls in interest rates (helping bonds and stocks) in combination with a steady, slowly growing economy.
Such conditions don’t happen often, which is why they’ve been tagged with the name of a fairy tale.
Belief in Goldilocks is strong. And that’s important because the market, by betting on Goldilocks, has made it easier for such a scenario to happen. Rising prices for stocks and bonds tend to ease financial conditions.
Judging by Bloomberg’s own measure for the US, they are now their easiest (expressed in positive territory in the chart below) in almost two years, since before Russia’s invasion of Ukraine.
Goldilocks economy generally only delivers great returns if nobody expects it.
When markets have already set themselves up for just such an outcome, as we’ve just covered, not too hot, not too cold outcomes don’t help that much.
Just how can financial conditions be this easy? The most plausible answer is that liquidity, the availability of money from investment, has been growing even as central banks’ headline rates have risen.
John Authers 4 januari 2024
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