>FLASH MARKETS (ECONOMIC RESEARCH)

Liquidity is decorrelating financial markets from the real economy

The viewpoint we defend in this Flash is as follows: normally, the value of financial assets should reflect the situation of the real economy (growth, inflation, profits, etc.), in a more or less long-term perspective depending on the nature of assets and investors’ ability to anticipate. However, if global liquidity is over-abundant, and in a situation where inflation in prices of goods
and services cannot make a comeback, asset prices are successively affected by bubbles when investors use the surplus liquidity to try and buy assets.

This leads to asset price cycles that are less and less correlated with economic cycles, and are linked to the interaction between the excess liquidity and investors’ opinions or risk aversion.

This decorrelation between financial markets (asset prices) and real economy is very serious, since it implies that asset prices no longer give any reliable information about the situation of the real economy, and simply reflect the quantity of liquidity and the most often herd-like behaviour of investors.

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