December 17, 2016

Animal spirits yes, but of lions, hyenas or pussycats? Do we have irrational exuberance, or rational fright?

Sir, John Authers commenting on how the Dow Jones Industrial Average can top the 20,000 mark for the first time writes: “Animal spirits are back. The enthusiasm is palpable, and is on a scale unseen since the height of the tech boom”, “Echoes of exuberance as the Dow stirs animal spirits” December 17.

Authers, with “markets… were in a very different state” would seem to agree with that we are not talking of the spirits of the same animals. The tech boom had lions with great illusion and too much optimism and bravery pursuing a brand new future. The current boom, resulting from low interests, QEs and excessive public debts everywhere, seems more one of pussycats taking refuge in whatever is offered. Of course, as always, hyenas are present in order to feast on the many cadavers any heightened volatility causes.

What brought all this on? Sir, as you know I think, but you do clearly not want the rest of the world to think, that this is the natural result of regulators taming, or castrating, the animal spirits of banks. That they did with their capital requirements based on ex-ante perceived risks, precisely those risks that were often already being cleared for too much by the ex-ante-risk-adverse bankers Mark Twain referred to.

Authers now writes: “Trump’s deregulatory agenda could delight markets.”

That’s a new view I very much welcome. Over the last decades, public opinion has almost exclusively been fed the notion that all of its troubles were only the result of financial deregulation.

The problem though is that Trump, even though he himself has been a bank borrower, does not really understand that without removing the odious regulatory discriminations against the “risky”, like SMEs and entrepreneurs like Trump, his stimulus plans, that which includes tax cuts, has not a fair chance to work.