What could go wrong?

Photographer: atta kenare/afp/getty images

One Chart Shows What Investors Are Dreaming About

Mark Gilbert is a Bloomberg View columnist and writes editorials on economics, finance and politics. He was London bureau chief for Bloomberg News and is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”
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You've probably heard the old saw about equity markets "climbing a wall of worry." Stock market prices can rise even when the economic backdrop is gloomy as investors look ahead and anticipate better times.

But what if the good times fail to materialize? What if the records set by U.S. stocks in recent weeks are built on false hopes for what comes next from policy makers?

Monetary policy has done the heavy lifting to date, boosting asset values in the stock market and driving down borrowing costs in the bond markets to record lows for both companies and governments. But the law of diminishing returns seems to be neutralizing central-bank efforts to do anything more than stop the global economy from cratering; never-ending interest-rate cuts and expanded quantitative easing halted the economic slide, but don't seem able to generate robust growth.

Hence, there's increasing chatter about the prospect of fiscal action from governments, which is shorthand for borrowing money to spend on infrastructure projects, thereby creating jobs, boosting growth and investing in the future. The U.S., the U.K., Japan and the euro zone are all being urged to ease up on austerity and open their pocketbooks.

The chatter, though, has become a roar -- which raises the uncomfortable prospect that speculation about fiscal action will lead to disappointment. Here's a chart showing how the hubbub has become louder and louder in recent weeks:

The previous spike in mentions of fiscal stimulus came in January 2009, as the U.S. government prepared to introduce the American Recovery and Reinvestment Act, a fiscal package worth $814 billion as the economy went into a tailspin:

As the chart shows, growth is petering out again. The U.S. economy grew by just 1.1 percent in the most recent quarter, slower than the initial estimate for 1.2 percent expansion, according to figures released on Friday by the Commerce Department. That's better than at the start of 2008 (and no-one is predicting a repeat of the deep recession that followed), but still slow enough to see why talk of fiscal stimulus is in full cry.

There's more than the usual amount of August angst afflicting financial markets at the moment. Prices are stuck in limbo, with stocks, bonds and currencies all becalmed in a volatility slowdown that's unusually severe, even for the holiday season. Hedge funds are out of favor, unable to maintain their 2-and-20 percent fee structures. There's almost a sense of impending doom.

So the question posed by many investors is what might break the spell that's seen the Standard & Poor's 500 Index gain 7 percent this year and the combined value of stock indexes around the world increase by 10 percent in the past year. The scope for disappointments is wide: if the next U.S. president fails to make good on election pledges to repair infrastructure, if Japan fails yet again to make meaningful investments, if Germany continues to block fiscal action in the euro zone, if the U.K. government doesn't follow through on its promise to "reset" economic policy. Those expectations in the chart at the top of this article could be dashed very hard indeed.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Mark Gilbert at magilbert@bloomberg.net

To contact the editor responsible for this story:
James Greiff at jgreiff@bloomberg.net