The Stock Market Rally
Having been chastised for giving what I thought was faint praise to Iggy for moving on EI a couple of days ago , I’m going to really, really stick my head out here and wonder if Alan Greenspan has a point when it comes to potential positive linkages between the stock market and the real economy.
I think that we should be very, very cautious about seeing the recent run-up in share prices as portending a recovery in the real economy – given that, in the US in particular, production and jobs are still sinking fast, households have clearly decided to save rather than spend, the stimulus package falls well, well short of closing the output gap, and many banks are on the edge of insolvency and could still fail.
That said, Greenspan has a point when he suggests that higher equities will increase corporate liquidity and will, in the financial sector, help repair capital ratios and thus support more bank lending. Higher equities can only be good news for corporate sponsors of battered pension plans as well.
That is why it will be bad news when this temporary equity rally stalls and reverses, as I strongly suspect it will given the continuing dismal state of the real economy.