We are sometime between 1933 and 1936

We are sometime between 1933 and 1936
I believe the best way to understand the period of time we live in - both in terms of the economy and the markets - is to think of the world as it was between 1933 and 1936. This was the 'recovery phase' both for the global economy and for global financial markets - stock markets rallied and commodity prices were rising. Let's compare it to today. 1) Major countries moves to ease monetary policy In 1931 the UK was the first major economy to give up the gold standard and the Scandinavian countries and other countries in what became the 'sterling bloc' followed soon after. The UK economy and the 'sterling bloc' recovered fast from the Depression, but it was not enough to turn the fortunes of the global economy. However, after the FDR took the US off the gold standard in 1933 and the US economy entered a phase of swift recovery the global economy finally started to recover. Even the countries that stated on the gold standard - countries like Switzerland and the Netherlands - showed signs of recovery. We have a similar story today. The Federal Reserve has introduced the Bernanke-Evans rule back in September and the Bank of Japan has moved to a 2% inflation target. Both the Fed and BoJ are undertaking significant quantitative easing to achieve their targets. The Bank of England seems set to follow suit soon and might even introduce an NGDP level target - permanently or temporary. It is still early days, but for the last half year global stock markets have rallied, the US economy is showing clear signs of recovery and "mysteriously" the euro crisis has nearly disappeared from the headlines. The euro zone of course is the 'gold bloc' of today - the area of the world that refuses to ease monetary policy despite the clearly positive impact of monetary easing in other countries of the world. However, as the 'gold bloc' the euro zone is experiences a positive spill-over effect from the US and Japan - despite the "lose of competitiveness" due to a strengthening currency. 2) Higher stock prices and commodity prices - constant fears of "a new bubble" After the US gave up the gold standard commodity prices and stock prices entered a three year long rally that only ended in 1937 after an ill-fated and premature attempt to scale back monetary easing in the US. Dow Jones 1932 1938We are now half a year into a global stock market rally - I have no clue whether it will last of not and I am certainly not giving investment advice here, but the lesson from 1933 to 1936 is than when the major central banks of the world eases monetary policy stock prices rally. As do commodity prices and it was exactly the rally in commodity prices that unnerved central banks of the time. Even though the devaluations had had the purpose of reflating the economies central bankers of the day -as today were extremely fearful of sparking a new bubble. But despite of that the rally lasted three years. 3) The 'gold bloc' recovered despite inaction One of the untold stories for the 1933-1936 period is that the 'gold bloc' countries actually saw a recovery. It was a weak recovery and it was pale in comparison with the economic recovery in the US, the UK and the 'sterling bloc', but it was nonetheless a recovery. The causes of the 'gold bloc' recovery was two-fold. First of all the devaluations in the UK and the US sparked an sharp increase in imports in these countries as domestic demand picked up swiftly. That obviously helped exports from the 'gold bloc' despite these countries had seen a erosion of competitiveness due to the fact that their currencies had strengthen vis-a-vis for example the pound and the dollar. The second channel of recovery was obviously the improved global risk appetite that lowered funding costs - also for the 'gold bloc' countries. 4) Talk of 'competitive devaluations' and 'currency war' - calls for international monetary coordination  


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