Greed outpacing fear in global markets, says Goldman chief

Goldman Sachs chief executive David Solomon predicts interest rate hikes to 'take some of the exuberance out of certain markets'

Goldman Sachs chief executive David Solomon told Bloomberg's New Economy Forum in Singapore the global economy was facing a 'complicated time' as activity began to strengthen after the sudden shutdown in many parts of the world in 2020. Picture: Michael Nagle/Bloomberg

Greed is outpacing fear in world financial markets as investors respond to the pandemic recovery, Goldman Sachs chief executive David Solomon says, adding such periods of exuberance are usually not long-lived.

Mr Solomon told Bloomberg's New Economy Forum in Singapore the global economy was facing a "complicated time" as activity began to strengthen after the sudden shutdown in many parts of the world in 2020 because of coronavirus.

The unprecedented levels of stimulus ordered by governments and central banks had led to exuberance in certain markets, he said.

"I think markets generally when I step back and I think about my 40-year career, there's been periods of time when greed has far outpaced fear. We were in one of those periods of time," Mr Solomon told the Singapore event.

"We were in one of those periods of time and generally speaking, my experience says that, you know, those periods are not long-lived." Mr Solomon said the expectation of rising interest rates could reduce the heat in some asset markets.

"Something will rebalance it and bring a little bit more perspective. And given it feels like inflation is running above trend, chances are interest rates will move up and that will take some of the exuberance out of certain markets," he said.

Threat to eurozone stability

Meanwhile, the ECB said increasingly stretched prices in property and financial markets, risk-taking by non-banks and elevated borrowing pose a threat to eurozone stability. 

While the economic recovery from the coronavirus crisis means near-term risks have dissipated, vulnerabilities are accumulating with potentially grave consequences down the line, according to the ECB.

“Concerns particularly relate to pockets of exuberance in credit, asset and housing markets, as well as higher debt levels in the corporate and public sectors as a legacy of the pandemic,” it said in its Financial Stability Review, echoing former US Federal Reserve chairman Alan Greenspan’s description of the dotcom bubble in the 1990s.

The 19-state eurozone has rebounded sharply since the ECB’s last financial-stability update in May. European equity markets, meanwhile, have joined the global push higher, with riskier segments in particular seeing increasing investor demand.

Separately, the ECB highlighted growing vulnerabilities in home prices – especially for countries where pre-pandemic valuations were already elevated. It said that market was “more prone to a correction,” while also warning that investment funds, insurers and pension funds could face “substantial credit losses” if their exposure to lower-rated corporate debt sours.

“The markets for equity and risky assets have maintained their striking buoyancy, making them more susceptible to corrections,” ECB vice-president Luis de Guindos said in the report. 

“There have been examples of established market players exploring more novel and more exotic investments. In parallel, euro-area housing markets have expanded rapidly, with little indication that lending standards are tightening in response,” he said. 

• Reuters and Bloomberg