|Summary: The huge economic stimulus programs being undertaken by governments and central banks, and the difficulty in unwinding them, has created vast amounts of investment liquidity. With the globe awash with cash, the speculative boom in property and shares might go on for longer than expected.|
|Key take-out: Eventually the boom will crack, because it will take the value of assets beyond sustainable levels. Meanwhile, this is a wonderful time for share investors and home owners.|
|Key beneficiaries: General investors. Category: Economics and strategy.|
It is important to understand the massive forces that have now been unleashed on the stock and currency markets, plus other asset markets, as a result of the recent volley of events on the global stage.
In particular, the American debt crisis has delayed any real chance of an end to quantitative easing, at least until the end of the first quarter of 2014, and perhaps beyond.
On its own, that is creating a certainty of continued liquidity in global markets. But the story is much bigger than that. What we are looking at is a total new role for central banks, and one way or another they are pumping money into a large number of the world’s economies, which is spilling into equity/asset markets.
These stimulatory exercises have now been underway for between three and five years and, as I will discuss later, they are going to be extremely difficult to unwind. In Europe, the central bankers have virtually been printing money for three to four years, while the Bank of England is not that far behind. The Bank of Japan has been undertaking similar strategies for several years. In China they introduced one of the world’s biggest stimulatory programs during the Global Financial Crisis, and that stimulus one way or another is still proceeding.
Global markets are now taking this multi-country money printing exercise as part of life, because it has gone on for so long.
People like me have from time to time warned as to what is ahead, but those warnings have simply been a mirage under the weight of determined and maintained central bank stimulus.
No inflation or asset bubbles, as yet
Normally, when such stimulus takes place, inflation or asset bubbles break out and force the policy to change. But so far that has not happened. Partly, that is a result of restrained confidence by business and consumers. But the introduction of new technologies has substantially reduced costs. Just as important, globalisation means that in so many areas labour is a global commodity, and so a local stimulus does not increase wages to levels that cause inflation to burst out.
In turn these anti-inflationary forces limit the amount of actual economic stimulus that is delivered by the money printing exercises. Moreover, accompanying that money printing is very low interest rates. And while these stimulate investment, they also cut back on the spending power of those approaching or in retirement because these people need to spend their capital if they have their money invested in interest-bearing securities.
We are seeing a massive multi-country stimulation, the likes of which the world has never seen before. And it is going to continue well into 2014.
Unwinding the stimulus programs
One of the problems that the world faces is that because the stimulation has gone on for so long, unwinding it is going to be incredibly complex and will have all sorts of repercussions. Accordingly, earlier this year, when it seemed likely that QE3 would be “tapered”, we saw a sharp fall on Wall Street and an increase in interest rates in the US, which slowed housing and put great pressure on the currencies and economies of emerging and less developed countries.
As it turned out, the US debt crisis and the domestic reaction forced a postponement of any tapering.
In China, earlier this year, they too started to institute measures to cut back on speculative lending and tried to begin to make the Chinese economy less dependent on infrastructure investment and exports.
As in the US, the repercussions of that action caused the local economy to slip and interest rates to rise, and so it was reversed.
Here in Australia, the effect of that China reversal has been a big rise in demand for iron ore. In Europe, they really haven’t attempted a reversal, and any such move would have catastrophic effects because most of the European banks have far too much money tied up in speculative government bonds. And so the Spanish banks have Spanish bonds, sprinkled with a few Italian bonds etc., and that trends goes throughout Europe. Much of the money that has been raised to fund these sorts of exercises has come via the sloshing of liquidity around the world, created by the various stimulative exercises.
A prolonged boom
Again, if that money was cut off, Europe would be in some danger. And so the central banks are trapped and are going to have extreme difficulty unwinding. That means that we are going to have a speculative boom in property and shares that might go on for longer than we thought.
Eventually it will crack, because it will take the value of assets beyond sustainable levels. Meanwhile, this is a wonderful time for share investors and home owners. Party poopers, like me, will have to remain silent, but unless business creates a great deal more wealth so as to justify high asset prices it will come to an end at some point. But, of course, the more ugly the end the more central banks will try and prolong good times, particularly when elections are due regularly in the countries in which they serve.