Interlude

Global equity markets have risen dramatically these last couple of months and many active fund managers have already logged greater returns than they did all of last year. The markets have overcome the fear that decreased liquidity in China would collapse their speculative property markets and cause an economic implosion; ramifications of a troubled Euro zone, perhaps even a Greece in default, was “priced in” last October; US employment data continues to improve; central banks are telling us that interest rates will stay low forever; and, to top it all off, the imminent launch of Face Book, at an astronomical valuation, confirms that we're all ready to start huffing and puffing and inflating another internet bubble, AKA “social media”. So, are all conceivable negatives “priced in” and we're forced to participate in the social media bubble or forgo any chance of gain?

Surprisingly, there are a couple of “old school” indicators confirming that the markets are solidly in the ascendency: first, US and German government debt is trading at levels indicating that participants are already highly risk averse (supporting the argument that much risk capital is sitting on the sidelines); and during the last two months there has been a narrowing spread between German and other Euro area yields, indicating a greater degree of confidence in the peripheral economies. Before concluding that the markets are about to enter another “virtuous cycle” it's worth having a look at commodities, which have been left on the sidelines (and this includes gold) these past couple of months. The latest rounds of QE, and promises of more to come, might also change the way government spreads should be analyzed – after all, who has been instrumental in narrowing that spread?

Finally, there's a $100 million company called GSV Capital Corp (NASDAQ:GSVC) that might indicate the importance and fate of the new social media industry. This company has several non-listed sector investments; traded around $14 for the last half year and popped up to $18 once the Face Book IPO surfaced (now it's back to $17 and change). Seems logical to contend that if GSVC triumphs it will be because risk capital is flowing into the market – now, let's see if Treasuries and Bunds roll over and commodities trade up – confirming the advent of a new virtuous cycle and an end to the current market interlude.