Markets Too Optimistic About the Future | When looking at recent movements in equities, gold, interest rates, and the dollar, one scenario clearly dominates investor expectations: further cuts in U.S. — and possibly European — interest rates, followed by a prolonged period of stability. Stability, in this context, refers to the assumption is that the economy will grow around its “potential growth” rate — the sum of labor force growth and productivity gains. This is considered a balanced situation: the economy grows at its maximum sustainable pace without fueling inflation, at least once it operates near full capacity. Both the U.S. and, to a slightly lesser extent, Europe are currently in such a phase of high capacity utilization.