Central banks are pushing on strings

You'd be forgiven for thinking everything was alright in the world if you were to look at how stocks are performing. But the recent rises have more to do with fiscal stimulus than an improving economy.

There’s an air of unreality about the sharemarket at the moment.

Last night Wall Street took a hit because of the new IMF forecasts, but is still close to a five-year high after a powerful three and a half year bull market.

Yesterday the Australian market hit a new 2012 high on the back of a sudden spurt in the iron ore price, as the IMF cut back its forecasts for global growth, Rio Tinto added to the gloom about China by cutting back its forecasts for that country, and the local polity managed to plumb new depths.

Investors have long since ceased to worry about politicians, but how to account for the disconnect between what might be called the real world and the financial one?

The answer, I think, is that monetary policy is helping asset prices and markets, but not the world’s economies. In other words there is cash aplenty, which has to go somewhere; it’s not yet going into productive, growth-supporting investment, rather it’s seeking safety – but it is giving the world time to recover.

The world’s economies are in the midst of a long correction to decades of debt-fuelled growth in consumption. So far central banks successfully prevented a 1930s-style debt deflation but have not managed to rekindle growth.

As the IMF noted in its latest World Economic Outlook, the central problem remains Europe, where demand is crashing because of a collapse in confidence and government fiscal austerity. That is leading to a sharp deceleration in China’s exports and much weaker growth there than expected.

In fact export growth in China has dropped from 10.5 per cent, year-on-year in the second quarter to just 2 per cent in July-August, which has shocked both the market and Chinese policymakers.

The People’s Bank of China is pumping liquidity into the financial system, but is having much the same impact on the real economy as the European Central Bank and the Federal Reserve – that is, not much.

Chinese factories are being told to keep producing, and employing, but with weak demand their output is going into stockpiles.

Meanwhile the CEO of Rio Tinto, Tom Albanese, yesterday told a conference call that Rio had cut back its forecast for China from above to "just below” 8 per cent, which is roughly where the IMF’s forecast now sits.

But both of them look too optimistic. China’s growth in the second quarter was 7.6 per cent and its figures for the third quarter are due out this weekend. Analysts expect it to have fallen to below 7.5 per cent.

Where China’s growth will come from with European imports crashing is, in some ways, the key question for Australia.

Central banks everywhere are pushing on strings, trying to kick-start feeble economies. The Australian Reserve Bank is likely to find itself in the same position before long as the mining investment boom slows.

In Canberra the consensus around fiscal discipline between the major parties appears to be holding, although the way politics appears to be degenerating, anything could happen on that score.

Yet the stockmarket is motoring ahead and the local property market appears to have bottomed as well, with auction clearance rates heading up. Similar things are happening in many share and property markets around the world.

In the end, reality bites, but question is: which reality? The point being made by the markets is that not everything is gloom and doom.

The fact that central banks have removed the prospect of debt deflation, perhaps permanently, has given debtors time to get their balance sheets in order, and in the meantime the corporate sector is reaping the benefits of five years of hard work on costs and productivity.

It might just work.

Follow @AlanKohler on Twitter

{{content.question}}

{{ twilioFailed ? 'SMS Code Failed to Send…' : 'Enter your SMS code' }}

A text message with your verification code was just sent to {{user.DayPhone}}

We cannot send you a code via SMS to {{user.DayPhone}}

Hi {{ user.FirstName }}, please provide your mobile number.

{{ content.trialHeading.replace('{0}', user.FirstName) }}

We'll send you a text message with a verification code to start your free trial.

Log in

{{ content.upgradeHeading.replace('{0}', user.FirstName) }}

The email address you entered is registered with InvestSMART.

Login or to reset your password, select Forgotten password

Email is required.
Email must be a valid email.
Password is required.
First name is required.
Last name is required.
Mobile phone number is required.
Mobile phone number is invalid.
You must accept the terms and conditions.

Already an InvestSMART member? Log in

SMS code cannot be sent due to: {{ twilioStatus }}

Please select one of the options below:

OR

Looks you are already a member. Please enter your password to proceed

You have entered an incorrect email or password

Email is required.
Email must be a valid email.
Password is required.

Please untick this box when using a public or shared device

Not a member? Sign up

Forgotten password? Click here

Your membership to InvestSMART Group recently failed to renew.


Please make sure your payment details are up to date to continue your membership.


Having trouble renewing?

Please contact Member Services on support@investsmart.com.au or 1300 880 160

You've recently updated your payment details.

It may take a few minutes to update your subscription details, during this time you will not be able to view locked content.


If you are still having trouble viewing content after 10 minutes, try logging out of your account and logging back in.


Still having trouble viewing content?

Please contact Member Services on support@investsmart.com.au or 1300 880 160

{{ upgradeCTAText }}

Updating information

Please wait ...

Trial

{{ productPrice }} / day
( GST included )
Price $0
Discount -{{productDiscount}}
GST {{productGST}}
TOTAL   (inc. GST) {{productPrice}}
  • Mastercard
  • Visa

Please click on the ACTIVATE button to finalise your membership

You have entered an incorrect email or password

Email is required.
Email must be a valid email.
Password is required.

Please untick this box when using a public or shared device

Not a member? Sign up

Forgotten password? Click here

Related Articles