Global economic disconnect likely to lead to crash landing

WHEN a sober-sided body like the Organisation for Economic Co-operation and Development (OECD) - which is normally associated with worthy (if sometimes rather dull) economic analyses - flags the risk of a "snapback" in financial asset prices (from inflated to normal levels), it is time to sit up and take notice.

It said in its latest Global Interim Economic Outlook: "There is a disconnect between financial markets and the real economy." Those are words that even former US Federal Reserve chairman Alan Greenspan might have envied when he spoke of "irrational exuberance" afflicting markets during the 1990s dot-com bubble.

There is no absolute gauge of market exuberance. It all depends upon investor confidence, plus the amount and cost of financial liquidity that happens to be available at a particular time. In the short term, financial asset prices can vary enormously, but in the longer term, they need to be anchored to "fundamentals".