The last few days have provided proof, if any were needed, that markets are in the hands of central banks.
A new war in the Middle East and tensions in Eastern Europe from the shooting down of a civilian aircraft would normally be the signal for some kind of financial market correction.
This time, so far, so good. This morning’s reports put the 0.2 per cent fall on Wall Street down to geopolitical tensions, but that’s hard to take seriously after Friday’s 1 per cent jump.
Why? Because markets these days are entirely driven by monetary policy -- they are Teflon-coated with cash.
It helps that the United States is close to self-sufficiency in energy, having become the world’s largest oil and gas producer this year, outstripping Saudi Arabia. And it also helps that 68 per cent of US companies to have reported so far for the fourth quarter outstripped expectations, and that there is an M&A boom going on.
But in fact it’s all about the Fed -- and the ECB and the Bank of Japan. Markets had what was called the 'Greenspan put' a decade ago, when Fed chairman Alan Greenspan was prepared to do anything to support asset markets. Now they have the Yellen/Draghi/Kuroda put, with triple the power.
That’s not to say markets are totally immune from geopolitical risk, just insulated. Israel going into Gaza and the prospect of sanctions against Russia (or perhaps worse) are worrying, but not enough to cause the sort of correction that hit in recent years as a result of the fiscal turmoil in Europe.
Only two questions matter now for the markets. First, is it even possible for the bull market to end before interest rates start rising from zero, and second, what happens when they do?
It should be added that in Australia, there is only a genuine bull market in banks, because they are our equivalent of bonds (popular fixed interest securities). They have rallied some 50-60 per cent in two years because of the decline in the global interest rate structure.
The resources sector has been held back by the slowing of the Chinese economy. In the past, mining stocks have rallied because the Chinese government has, once again, turned things around through fiscal and monetary stimulus. The decline in GDP growth towards 7 per cent has been put off for another year.
As for what happens when the Fed starts raising rates next year … well, given the US central bank’s policy of complete transparency these days, it’s hard to imagine that investors won’t have fully anticipated it by the time the moment arrives.
Of course, anything is possible when expectation turns into reality, but the reality of QE tapering has been handled smoothly even though the expectation resulted in last year’s 'taper tantrum'.
In fact, the bears are struggling for credibility these days. Whether the markets are up or down, rocky or smooth, there are always pessimists ready to tell us things are going to get much, much worse. As Bob Dylan once wrote: “Nothing really matters much, it’s doom alone that counts”.
As always, there are plenty of doubters around now of course. Trouble is, no one’s listening.