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Published: September 8, 2009
Why is it important to have government and central banks on your
side? Let’s take a look.
The most important ingredients for rising stocks prices are not
corporate earnings and global economic growth. Instead, the key
elements are interest rates, inflation and sentiment along with
help from government fiscal and tax policy.
Right now, we are living in golden times for the “Big Four:”
Inflation is low, interest rates are very low, governments
around the world are pouring money into the economy and
sentiment is still well below bull market peaks. Historically,
analysts at independent BCA Research say, this is the
environment in which stocks prices have done their best.
As long as a recovery remains anemic with lackluster job growth,
it remains the subject of tender mercy by policymakers desperate
to placate an unhappy electorate. And so it is weakness that
keeps the government from withdrawing assistance by applying
higher interest rates, raising taxes and halting loan support
programs.
The recent fall in China stocks is a perfect example of this
theory in action. The declines come amid new evidence of
economic strength. Traders were spooked by Beijing’s efforts to
tighten runaway loan growth and tighten monetary policy — not by
any evidence of economic weakness.
And remember that rocket launch out of March was fueled in part
by the U.S. Federal Reserve’s announcement it would directly
purchase $300 billion worth of U.S. Treasury debt through its
Permanent Open Market Operations. Is it any coincidence that
stocks are beginning to weaken as that initial allocation begins
to run dry? According to my calculations, more than $276 billion
has already been spent. At current spending rates, the remaining
funds will only last another two weeks or so.
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My guess is that a new allocation will be announced after the
next Fed meeting on Sept. 23, especially if the stock market
remains on shaky footing. More easy money, along with continuing
signs the global economy is moving slowly in the right
direction, will likely reenergize the bulls later this month. As
shown in the chart above, Credit Suisse Group AG (NYSE ADR: CS)
economists are projecting a synchronized global recovery in
which it will take nearly a full year for global gross domestic
product (GDP) to recoup its losses – the weakest recovery in the
three global recessions since 1970.
If recovery is indeed drawn-out, this is paradoxically great
news. It seems backwards, but a long, slow, U-shaped recovery is
exactly what investors should want to see. The robust, V-shaped
economic recovery that politicians seem to want would be the
worst possible thing to occur.
-- Jon Markman
Contributing Editor
MoneyMorning.com |
