Have you noticed recently the increased volatility in the global stock market? It seems that the US, Europe, or Asian markets are operating on nine pins. Any one piece of economic news and a stock market swoons – and its been like this for several weeks now.
At the same time we know that quantitative easing (QE) has pumped trillions of dollars into the stock market and the investor classes. Private firms have not used QE to open up the floodgates of capital investment; instead they have kept the cash on their balance sheet, paid down some debt, or bought back their stock to increase their EPS – even if there is no real improvement in their operating models. Do you think that QE might be related to the massive stock market gyrations we have seen recently?
We know the Chinese economy is slowing down. Globcal commodity prices are low and showing no signs of increasing, and this seems set to continue mainly due to the slow down in China. This pushes disinflationary pressures around the globe. This is one thing the US Fed does not want to see – they want to see a little dose of inflation. With US employement levels appear quite high (albeit driven by low wage/skilled jobs), a little price inflation on goods and services would likely lead to some wage pressure, which would then feed back into increased consumer spending.
Lastly, I was alarmed to see a headline in today’s US print edition of the Financial Times: “Tokyo eyes Y2tn stimulus amid Asian growth fears“. Really? Enough already. Our markets are already awash with too much cash; its as if our global leaders want to banish economic hard times as if they had the power. QE has not really produced the results desired – see yesterday’s US print edition of the Financial Times: “The printing press rolls…“. We need to let nature take its course – money wise – and instead focus on aligned and collaborated currency, investment, and tax policy. Tinkering around with soverign specific situations is actually doing more damage. If Japan eases, so too will Europe. Then before you know it, the US will have to follow again. We need coordination, not calculated advantage.
Right now the Fed rate decision must be on a knife edge. Both the IMF and World Bank have now called on the Fed not to raise rates as doing so would damage global economic conditions. But when looking at domestic policy, there are some grounds to increase rates. However even these domestic points are not conclusive: capital investment and wage growth remain muted. And capital investment and wage growth weakness is due to policy weaknesses that are not addressing the need for innovation, investment and the creative destruction needed to create a faster growing economy.
It seems that the Fed is caught between a rock and a hard place. They need to show that they can contain bubbles and that requires interest rates to go up. The main bubble however is the one they created with QE. So once interest rates go up the stock market will go down, and possibly significantly. The first rise, however small, signals that the QE party is over and will never come back. At least that is the signal such a raise would make.
We now live in a heavily governed, regulated, and controlled economy. We need our leaders to prioritise what to control, and get the heck out of the way of the rest. Where we are headed, with more QE, more soverign-specific advantage seeking, and no policy coordination, is likely to be more choppier seas and a much harder crash.