Bernanke speaks and we all tremble

Markets are still fragile from the global financial crisis making them susceptible to apparently unrelated events. Except, it turns out, there’s a connection after all: the huge volume of dollars being printed by the US Federal Reserve.

Markets are still fragile from the global financial crisis making them susceptible to apparently unrelated events. Except, it turns out, there’s a connection after all: the huge volume of dollars being printed by the US Federal Reserve.

That’s turned everything topsy-turvy. The drop in our dollar is a case in point. Normally that would be good news for the sharemarket because it would boost profits for miners and make our market look better value in other currencies. Instead, the lower our dollar, the more it seems to pull down the market.

Let’s also look at Wall Street, which has just come off a record period despite five years of indifferent economic growth.

Yet Wall Street threw a wobbly when Ben Bernanke, head of the Fed, said he might ease off with money printing next year because the economy will be growing at 3 per cent to 3.5 per cent. Surely it’s better to have a genuinely growing economy than one propped up by an artificial, monetary-induced high?

Then there’s the bizarre correction in Tokyo, which had previously taken off when the Bank of Japan announced the mother of all money printing. The Japanese market might have been due for a correction anyway (as is Wall Street), but there’s no doubting the trigger was Bernanke’s comment suggesting his own money printing might be eased back.

That’s another thing. He’s said it all before. So it should have had nothing to do with the Japanese correction.

It’s the same story here. Local news, whether good or bad, is being swamped by what can only be called ‘‘global fiscal forces’’. These are pulling markets every which way, like movements in the tectonic plates under the earth, distorting prices and sending false signals to investors. That’s why if you’re investing in the sharemarket, you need to keep something up your sleeve.

The printing of US dollars – which, as the reserve currency –has pumped up not just Wall Street but just about everywhere else. It is also why the mere hint of this ending can send shock waves through markets. Never mind the reason why it’s ending, the important thing is that it worked.

The idea was to inflate property and share prices by keeping interest rates at historic lows which would, in turn, restore confidence in the US economy. Mission accomplished. Oops, bad analogy.

Another fault line is the fiscal bankruptcy of most of the eurozone. That could bite any time as sovereign debt there is linked to the solvency of some of the world’s biggest banks, but let’s not go there.

Perhaps the biggest, though least acknowledged, economic distortion is China. Its white-hot growth rate was fuelled by an infrastructure investment boom financed by local governments using runaway property values as collateral.

That growth is being reigned in, which is why commodity prices have been falling, making China the only major economy where monetary policy is being tightened.

Who knows what the upshot of that will be? No wonder markets can’t figure it out.

So all you can do is have some cash on the sidelines for the next seismic shock.

Twitter @moneypotts

Related Articles