Opinion | This nasty asset-price correction is poised to gather speed
Prepare for a major reset as factors such as higher inflation and slowing global growth force the unwind of overvalued assets such as equities and property
Since my last column, there have been even more disturbing signs of overvalued markets. These include residential property, the US dollar, bonds, equities, and now even industrial commodities, though I see resources relatively less euphoric given the sound supply and demand fundamentals. Still, there is a possibility of resources being driven higher by expectations of a further round of currency devaluation, particularly in the US dollar. If so, then I am afraid even resource prices may turn into a bubble, which may trigger unpredictable consequences for overvalued paper assets.
The world is likely on course for higher inflation. Manufacturing and mining utilisation rates in many places have risen conspicuously, a result of a shortage of mining and manufacturing capital expenditure especially in debt-ridden developed countries, where excessive money printing leads to more speculation instead of much needed capacity investment. Much higher oil prices will soon exacerbate inflation.
The recent rise in US dollar index futures open interest was triggered by opposing views of certain wrong-footed money managers. Both non commercial longs and shorts increased by about 5,000 contracts, so the net longs remain fragile.
The value of the US dollar against hard resources and other currencies is determined by the US federal budget deficit, which I believe will grow sharply in light of already slowing receipts and rising outlays.
The worsening US trade deficit even as the US dollar softens says it all.