Unsustainable Market Trend Warns IMF

April 2014 has thus far been a great month for investment bankers and stockbrokers as well as their clients. April Fools’ Day in the United States did not fool the financial professionals on Wall Street or across the pond in the City of London. By the time the first trading week in April was coming to an end, bullish investors had pushed the S&P 500 index to a high of 1,890.90, one of its highest levels recorded in the post-crisis marketplace.

The FTSE All World index, which covers 49 countries and more than 2,400 equity stocks, posted record high levels that were last seen in late 2007. American markets were expected to post even higher numbers in April after the labor market report indicated that the winter hiring slump was mostly over.

Amidst all this market excitement, the Managing Director of the International Monetary Fund (IMF) issued sober warnings about what she sees as a contrast between optimistic traders and guarded policymakers. Christine Lagarde expressed her concern about the world economy growing slowly and at an underwhelming pace over the next few years.

If anything, the financial exchanges of the world are reacting to the U.S. Federal Reserve interventionist monetary policies undertaken since the Wall Street meltdown of 2008. The recovery has been swift for the American markets, which have rebounded by 180 percent as a whole in just five years. As a result, the U.S. dollar is once again finding its position as a strong world currency.

For all the excitement on Wall Street and the City of London, emerging markets have not enjoyed reasonable growth on a year-over-year basis. This is what IMF Director Lagarde refers to when she warns about what she calls “low-flation” in the economies of European Union member nations. She has also made reference to geopolitical issues such as the delicate balance of power in Ukraine. Although the world economy is set to grow more than 20 percent by the end of the decade, Director Lagarde believes that there is little basis to support that forecast.

Director Lagarde added that the worldwide labor situation is still sluggish. She recommends further easing of monetary policy by the European Central Bank to avoid deflation. This sedate assessment by Director Lagarde seems to be largely ignored by investment bankers feeling quite bullish on Wall Street. There is plenty of evidence that the U.S. economy is on the right track to recovery, which explains why traders in other major financial markets are also bullish. The IMF warnings are not being ignored, but investors are paying closer attention to quarterly progress.

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