'2007-lite' is our term for policy makers trying to recreate conditions as close as they possibly can to pre-crisis levels via aggressive policy intervention. Given this, there are three possible broad scenarios going forward. 1) Its possible that policymakers around the Globe have pulled off a masterstroke and have propelled the Global economy back to sustainable growth and that the 'Great Recession' will be seen as severe but not one that had any major structural long-term impact on the economy; 2) The strong rebound in the Global economy will eventually be checked by the burden of higher debt and growth will settle at a notably lower trend rate than pre-crisis levels, especially in the Developed world. This is the 'new normal' type outcome; 3) The bill from the unparalleled intervention that saved the Global economy eventually leads to huge Sovereign financing problems possibly leading to a combination of higher yields, higher inflation or possibly restructuring/defaulting Sovereign debt.
Clearly these are very broad paths but knowing which one will prevail and when, is going to be the key medium-long term question that needs answering. Its entirely possible that we'll go through all three paths chronologically. If so timing is key. For now the market is happy that we are in scenario 1 and on days when the Sovereign headlines fade there is absolutely no doubt that this looks quite like a normal economic recovery in many places, and one which equity and credit markets can prosper in. However scenario 2 would be a much more difficult environment for them and scenario 3 would be a very negative backdrop.
Well, but Societe Generale sees their defined "Inflation Scenario" as the central one for the next 3-5 years, and prepares with appropriate asset allocation. Interestingly that this "Inflation Scenario" prefers only "some Equities". Click on slide to enlarge, courtesy of Societe Generale.
Market seems enjoying the combination of "2007-lite" and "asymmetric" inflation scenario?