The mother of all bubbles? Bank of America points to Washington as the main responsible

A situation fostered by accommodative policies and the overvaluation of multiple assets

The still ongoing pandemic has required a war economy in terms of fiscal and monetary stimuli to cushion the blow delivered by Covid-19. However, aid from Washington also has collateral effects as seen in multi-asset class valuations, risk taking and performance poaching.

In this sense, Michael Harnett, chief strategist at Bank of America Securities, and his team are already talking about the “mother of all bubbles . ” A situation fostered by accommodative policies and by the overvaluation of multiple assets.

As far as the “political bubble” is concerned, this bank indicates how the main central banks around the world have bought 1.1 billion dollars in assets every hour since last March. In the particular case of the Federal Reserve, its balance already reaches 36% of GDP, a historical maximum. In World War II it was 11% of GDP and after the financial crisis of 2008 it grew to 15% of US GDP.

But not only cheap money and liquidity through the purchase of assets contribute to risk taking. Stimuli from the federal government now reach 32% of GDP , well above what was disbursed after World War I and the hangover left after the collapse of Lehman Brothers, getting closer and closer to 42% of GDP spent in World War II .

“The excess of policies in Washington incites the excess of prices that we see on Wall Street,” warn Harnett and his team. In this sense, they refer to the “asset bubble” and highlight how, since last March, the capitalization of the global equity markets has grown at a rate of 6.2 billion dollars per hour . In this way, the increase already exceeds 50 trillion dollars in just 11 months when a similar increase after the financial crisis of 2008 took 102 months to materialize.

 

All this at a time when the rebound experienced by retail sales last January could “change the rules of the game”, given that the next stimulus prepared by the Biden Administration and the Democrats in Congress will include direct checks worth 1,400 dollars. 

In this regard, they mention what happened in February 1994, when a rise in consumption translated into a boost in job creation, thus ending the “jobless recovery” registered at the beginning of the decade. All of this prompted the Fed to raise interest rates. “Unlike 1994, at the moment the Fed looks for the irrational exuberance of Wall Street but it is probable that there will be a correction of more than 10%”, they warn from Bank of America Securities.

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