Every end of the year, by the end of the year, we receive numerous estimates of global GDP growth and inflation for the following year. Historically, almost in all cases, expectations of inflation and growth are too optimistic in December for the following year.

If we look at the track record of central banks, it is particularly poor in predicting inflation while large supranational entities tend to err on the side of optimism in GDP estimates. The IMF or the OECD, for example, have been particularly poor at estimating recessions, but mostly accurate at making long-term trend estimates. Contrary to popular belief, it seems that most forecasts are better at identifying long-term economic dynamics than short term ones.

One of the great mistakes among economists is to receive the measures of central banks as if it was the revealed truth. It is surprising and concerning that it is considered mandatory to defend each one of the actions of central banks. That, of course, in public. In private, many colleagues shake their heads in disbelief at the accumulation of bubbles and imbalances. And, as on so many occasions, the lack of constructive criticism leads to institution complacency and a chain of errors that all citizens later regret.

Monetary policy in Europe has gone from being a tool to help states make structural reforms to become an excuse not to carry them out.

According to JP Morgan, equity markets have not been this expensive so early into an economic recovery phase in the last twenty years. The Greed vs Fear Index also shows extreme optimism, while the Call to Put ratio in derivatives, that reflects the derivative exposure to a rising market, is also at multi-year highs. Meanwhile, the amount of negative-yielding bonds globally has risen to $18 trillion and the High Yield Index has risen to pre-crisis levels.

Many factors explain this level of optimism in markets. The news about vaccines and estimates of a rapid economic recovery accelerated investors’ bullish bets.

United States jobless claims have picked up since the elections and the second wave of coronavirus have slowed down the economic recovery. Uncertainty about tax increases and changes in labor laws including an increase in minimum wage add to the fear of new lockdowns as employers see the devastating effect of these lockdowns in European employment.

While the United States has been able to recover fast and reduce unemployment to 6.8%, the Eurozone jobless rate rose to 8.3% before we consider the large figure of furloughed jobs that remain idle. The second wave of coronavirus in Europe has seen new government-imposed lockdowns and the impact on the economy is already severe Estimates for the fourth quarter gross domestic product assume a double-dip recession and another increase in unemployment.