Dow, S&P hit records, world shares near 6-year high on Beijing reform and US stimulus hopes
SCMP headline, November 19
I would skip the bit about Beijing reform. Markets that pay any attention to Beijing's announcements actually dropped a notch when President Xi Jinping said last week that he would more efficiently preserve an inefficient economy but then didn't say quite how.
The running is actually all down to Janet Yellen, the presumed successor to Benjamin Bernanke as head of the United States Federal Reserve Board. In so much Fedspeak (actually the proper dialect for a central banker) she as much as promised to keep interest rates low indefinitely.
This has been the theme of US monetary policy for more than 20 years. Every now and then the Fed says: "Maybe it would be best for us to run things a little tighter just now." Whereupon financial markets say: "Boo!" The Fed then says: "Well, maybe it wouldn't be after all."
It's a classic case of putting the cart before the horse. Elsewhere in the world, central banks discipline the market. In the US, the market disciplines the central bank.
The Fed runs in fear of Wall Street, and Wall Street will tolerate no direction but up in asset prices.
It all does little to push up US economic growth, which remains under 2 per cent, while earnings growth actually slid in the third quarter.
This tired beast just doesn't want to be flogged into a racehorse.
But the easy-money policy does bring relief to the US government by reducing borrowing costs on US$17.1 trillion of federal debt, and it does keep some distressed sectors of the economy afloat.
I recently had occasion to ask an Illinois agricultural financier what an extra 200 basis points in interest rates would do to his clients. He rolled his eyes. Farm balance sheets have grown no stronger with low rates. Quantitative easing has only really benefited speculators.
The rest of the world suffers as well from this push on financial asset prices. Three separate reports on the front page of our property section yesterday attest to it:
1. Britain may impose new taxes on foreign property investors in response to soaring house prices in London.
2. The [mainland] authorities have tried for more than a decade to rein in rapidly rising home prices, but in vain.
3. Measures taken by the Macau government to curb soaring property prices have failed.
That's just one page on one day on property alone, and you can safely attribute it to easy-money policies in the US. They have infected first Europe and now the entire world. Yields have fallen with low interest rates and sent prices rocketing up for little real gain in underlying income.
The US government can of course legitimately take the view that it is responsible only to its citizens, and cannot really be held to blame if others have quietly hitched their currency wagons to the US monetary horse.
But it's a viewpoint for an older world. It doesn't really hold any longer. The US economy can hardly be said to stand on its own when its principle supplier in consumer goods alone lies outside its borders and, more to the point, easy money has corroded the underpinnings of the US financial system as much as those of any other country.
It won't last. I can't say when this ramshackle structure of debt and valuation delusion will break down, but it is a distortion of normal financial workings. If this is sustainable, then give me knife and fork, pass me the salt and pepper, and I shall eat my hat.
I pity those people who look at the portfolio statements that their financial advisers send them and think they can really safely indulge in a cruise upgrade to the deluxe suite and business class tickets to get there because their brilliant investment insight has again delivered them a "profit" in the total value of their holdings.
Which is a roundabout way of saying that I think Janet Yellen is not good news at all for either the US or the rest of the world. She shows no more willingness to stand up to Wall Street than her predecessor did, and that's not good even for Wall Street.