Tuesday, February 6, 2018
World Stock Markets Are Stabilizing : Was This the Medicine Needed to Rid Us of the Folly of the Obama / Bernanke / Yellen / Draghi QE Cheap Money Days
THE REAL NEWS TODAY IS ALL ABOUT WORLD STOCK MARKETS. So, let's get that issue out of the way. • • • THERE THE WORLD ECONOMY HAS BEEN. I am not a financial professional so these are my layman views, although I follow the markets to stay informed. It is a much a political interest as a financial one for me -- but then, everything is political, whether we recognize that fact or not. So, it seems to me that we are now feeling the effects of the end of the easy money policies of the Obama era. Called Quantitative Easing, what QE really did was pump cheap money into the banking system for years. The easy money made the bnaks happ becaiuse their cost of fluidity -- having enough money on hand -- was "zero" or close to it, and business was happy because it meant they could borrow at extremely low rates of interest that were totally disconnected from the norms of a real world. QE put in place by the US Federal Reserve under Ben Bernanke continued under Janet Yellen -- she was apparently the 'brains' behind the QE concept instituted by her protégé Bernanke. It was meant to ease the way for business after the 2008 real estate bubble crashed by providing cheap money to tide the world over during severe aftershocks following 2008. Europe followed suit and is still pumping billions of Euros into the European economy, although ECB chairman Mario Draghi has announced that its QE may end by September. Japan had already been doing much the same thing for many years -- its 20+ years of 'stagflation' is the result of that according to many experts. • • • WHERE THE WORLD ECONOMY IS NOW. But, when Trump came along and cut through the stultifying economic mess caused by the world economy being 'managed' by federal central banks instead of by the freer markets that usually keep things on a stable keel. Lower taxes and much less regulation led to a perfectly predictable result. The markets liked what Trump had done to unchain markets from bureaucratic management, and the world's markets rose -- bonds, stocks, business confidence, jobs, wages. At the same time, the Yellen era at the US Federal Reserve came to an end with the appointment of Jerome Powell as Fed chairman. Powell, more conservative and opposed to continuing QE, arrived at his Fed desk on Monday, the same day that worldwide markets started to show unusual volatility -- and strangely, markets have often reacted badly to the first day on the job of a new Federal Reserve chairman. At the same time, talk was circulating in financial markets about higher interest rates, and the rebounding and healthy economies around the world began to show signs of the beginning of inflation. • • • WHAT IS GOING ON? There, we have the feared combination of a new untested Fed chairman, the loss of cheap money because of the end of QE and the possibility of higher interest rates, and the first signs of inflation, which is to be expected in healthy economies. All three events would in normal economic times signal the need to raise interest rates. It hasn't happened yet except in the U, where Yellen gave US markets a jolt by announcing in her last Fed meeting that there would probably be another 0.75% increase in interest rates in 2108. BAM! The banks of the world and their business customers, and the financial houses that make money by borrowing low from central banks at 'zero' interest and lending to their customers at still very low rates, saw the gravy train ending. All those pieces of news that were 'bad' for banks and business came together at the one place where money, business expectations and investor confidence meet every day -- the stock markets. Actually, Japan started it by falling 2.55% before the US markets opened on Monday. The European markets fell an average of 2.5% on Monday and US markets continued the rout by falling 4.5% in a Monday trading day with an extreme volatility seldom seen. Overnight on Monday, Asian markets continued to slide. And on Tuesday, European markets continued the rout before recovering some of the losses later in the session. European markets always react to the US and Asian markets and very seldom lead in market changes. • • • BUT, DEAR READERS, there has been no change in the underlying fundamentals of the markets -- the US economy is still flourishing and leading a global recovery. What has happened is that banks and business are angry that their cheap interest rates are in danger, and they are showing it by dragging the markets down. This is not being led by mom-and-pop retail investors. It is the pro's who are, as the Guardian put it, "throwing a hissy fit" because they have lost their cheap money. The proof that there is nothing wrong with the fundamentals and that the economic recovery is well underway and will continue was seen in the Tuesday US market futures that showed what looked like it would be a serious continuation of the market fall, but it didn't happen. When Wall Street opened on Tuesday, the Dow Jones industrial average gained 258 points after falling more than 350 points at the open. Then, the S&P 500 rose. The NASDAQ rose. Wall Street stocks swung in a range much as on Monday, but at levels much closer to levels before the market sell-off began, although still sometimes in negative territory. The Dow, the S&P 500 and the NASDAQ are trying to digest the bad news of the loss of cheap money, rising interest rates and threatening inflation, trying to find an upward trend again. Bruce Bittles, investment strategist at Baird, told CNBC : "Widespread and excessive optimism left stocks vulnerable to increased volatility as bond yields have moved off their lows. While there is some early evidence that selling pressures are becoming exhausted, and stocks could soon see relief, the broad market is seeing meaningful deterioration." What that means is that the stock markets were overpriced and jittery over the past week because they were becoming very risky investments at those prices, and this happened as corporate and government bonds with 2.5% to 2.9% interest rates provided safer competition for the money of professional institutional investors. The US markets continued the volatility all day, but showing a 2.33% increase by day's end. • We should think of these last few days as the parting shot of President Obama and his belief that he and a few left-leaning economists knew better how to 'run' the world economy than the combined wisdom and experience of the markets. It is yet one more example of Progressive elitism that is biting the dust. It took a big market hit to get rid of it. But, perhaps we are now free of one more Obama stupidity. Economists have been telling us for 5 years that when the easy money disappeared the markets would fall. Voila! They were right ! • And, we have to add the fact that the world economy was so glad to be rid of American bureaucratic management that it exploded -- perhaps too fast and too far up in a very short period. So, while ridding itself of the results of easy money, the markets were also pulling back, some predict it will finally be by as much as 10%, to be at more reasonable and less risky levels of growth. After all, we lost only around 7% of the 25% valuation increase that Trump policies have pumped into the markets -- a small loss compared to the $4+ trillion his policies have created in valuation. Still a remarkable achievement. The Dow closed at 18,332.74 on November 8, 2016, Election Day, and it closed at 24,912.77 on Tuesday, February 6, up 567.02 or 2.33% -- which means there are 6,580.03 points of value that would have to be lost before the Trump rally would be erased. • Carl Icahn told CNBC this today -- it is foolish to play the stock markets as if they were casinos. So, let's sit back, watch what's happening, and be sure that in the longer term, the stock markets are going to be just fine.