The sharemarket rally is now being driven by the same force that set up the excesses that led to the bust in the first place – an abundance of liquidity.
The world is awash with government money, both central bank “quantitative easing” (money printing) and budgetary stimulus, and this is, in turn, driving a re-run of the hedge fund speculation that popped the market in 2007.
The rally just keeps going, despite a small sell-off towards the close in New York last night that left the S&P500 down 0.5%.
Just when you think the support from fundamentals (economic growth and earnings) is simply too weak and it’s about to peter out, it takes off on another jog – and it was rising through much of the session last night, despite a shocking GDP number out of Japan (-4% for the March quarter).
The head of Morgan Stanley’s global economics team, Joachim Fels, wrote yesterday that the market could simply be swamped by a “wall of money”, despite all the fundamental arguments about a slow economic recovery and disappointing earnings.
“I think the big question is where will all the liquidity go that central banks are still pushing into the system? The Fed is only about a third of the way through its quantitative easing program, same for Bank of England, and the ECB hasn’t even started covered bonds and will soon give banks one-year unlimited financing at 1%. Excess money measures are now accelerating.”
Global money supply graphs are all pointing heavenwards, having been in contraction mode for 18 months thanks to the bank credit crunch that began in August 2007.
And as we saw during the early to middle part of the decade, money does bring happiness…if not the bliss of religious transportation or the warm glow of a good red wine, then certainly the optimism of speculation.
Systemic risk has gone and the cycle has returned. Hedge funds are re-emerging like mushrooms after rain and they are going long, not short.
Enjoy it while it lasts. The April super fund results from ChantWest yesterday showed an investment industry basking in solid returns. Growth funds (60% to 80% growth assets) managed to produce 3.4% in April, on average, while 100% growth funds made 5.8%.
The “market bottom assessor” survey of analysts conducted by Business Spectator’s sister publication Eureka Report, is overwhelmingly calling early March the bottom.
Markets always go in one direction for longer than you can imagine, and this rally is becoming no exception. With the hedge funds back in the game and surfing the wave of global liquidity, it could well go for a while yet – especially if US banks continue to stabilise.
It won’t just keep going and turn into a new bull market, of course. The paradox of thrift, inflation and fiscal consolidation will get it in the end, via unemployment and earnings downgrades.
The paradox of thrift is the phrase invented by Keynes to describe what happens when everyone saves. Individual saving is good, but when everyone does it – as is starting to happen now for good reason – then it’s bad.
And the massive fiscal consolidation task for world governments over the next few years was spelt out recently by the OECD.
Central banks will, at some point, have to tap the brakes. Neither they nor their political masters can replace consumer spending for very long.
But let’s end on a happy thought, if not a blissful one. If the market does not go below its early March lows again – which is entirely possible if there is no unforeseen event like the collapse of Lehman – then the bear market can be declared over.
We may be in for an extended period of horizontal folk dancing, as an old sub-editor used to describe a certain other human activity, rather than a new bull market, but that sure beats what happened between September and February.
This article first appeared on Business Spectator.
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