The markets have made a W shaped bottom and the next leg down into crash territory has been avoided.
Why?
The economy is so bad interest rates rises from a level of near zero up a notch to very little, have been forestalled.
Apparently this is good for stocks.
Obviously it is not good for stocks for the economy to be bad. What is good for stocks is for interest rates to be suppressed and money to be driven into the stock market as a safe home and one with yield and chances for capital growth.
This flow creates a virtuous circle, where money begets money and rising prices make rising prices.
This is exactly how bubbles are made.
But the US and European stock markets are not in a bubble, they are at roughly 17 p/e, high but not terribly elevated. They are hot but not boiling over.
The sad thing is, the whole situation doesn’t make much sense beyond a central authorities attempt to control the difficult situation of a weak recovery from a huge crash.
The reality is, the US economy is not so bad it needs zero percent interest rates, the US economy has been through worse economic times with interest rates much higher. Those interest rate never brought the house down around the economies ears. Those times didn’t last for years either.
So why does the Fed or for that matter the ECB or the Bank of England think we need negligible interest rates?
In reality the only people to get direct access to low rates are home owners, the biggest corporations and some of their credit based offerings like cars, banks and institutions who can cash their paper into rolling QE and governments issuing debt. The rest pay high rates with no apparent connection to sub 1% bank rates.
So why wont the Fed put up interest rates, are the above list of people unable to exist with old school interest rates?
If so, how do they get weaned off free money?
If they can’t be weaned off free money will we be lashed to zero rates forever?
People who save are having their wealth transferred to the low interest rate borrowers. The pensioners retirement resources are getting siphoned off to government, home buyers, stock holders, banks and corporations.
Is this the way ahead?
Pillage of the old and the prudent to artificial inflate assets to make another section of society artificially better off?
If the west can’t raise its interest rates even 0.25% for fear of a domino effect that might crush the global economy, then that economy must be sat on the edge of some kind of financial abyss.
Perhaps it is.
What is more likely is the ‘unconventional monetary policy’ is now conventional monetary policy. Zero interest rate policy is the norm and the old normal of meaningful interest rates will be the new special circumstance.
If governments do not go wild with the prospect of borrowing huge sums for no interest penalty, then it is clear that near zero interest rates for them is sustainable, but the balance of pulling this off will rest with a few people, their skills, temperament and random outside forces that might send in something horrible that could shatter over the whole delicate pyramid of givens.
Successful central control is fragile it always has been and always will. The messy rule of the masses via the market is more robust and that is diminished right now by the manipulation of the master variable of interest rates.
If the governments of the west won’t let go of control of the master variable and let the market decide interest rates, then the current situation will build up a new massive asset bubble and this will burst and put us back into a situation like 2007-2008. It won’t happen overnight but if we have no move on interest rates soon it will be clear this is the road we have been set on and we will have to find a way of making money on route to another abyss.
I personally think that the western governments and their central banks want to support their economies near these levels in the hope that activity will catch up with the artificial levels of activity that intervention/manipulation is subsidizing. As a whole we are all getting poorer in the process. Through the power of economics wealth is being invisible drawn from the workers and savers to the borrowers, the unproductive and outside creditors.
Subsidies are hard to cancel and that is the nub of the problem. Zero interest frate are a subsidy and many of us are receiving it indirectly. It is still a subsidy and subsidies are always a drain on the big picture.
It will be a huge balancing act to keep the economic and QE show on the road and one unlikely to run smoothly.
Really we should wish the central banks of the US, Japan and Europe good luck, because if they mess it up, we will all have a rough time of it.