Japanese Interest Rates, China-US Dollar Peg Ensure Cheap Credit Flood

What is really going in the stock market? Is it a melt-up or the prelude to a melt down, or both? While Woolworths (ASX:WOW) pursues Coles (ASX:CGJ) and James Packer retreats from the media business and rushes into the gambling, business, we take a quick step back this Monday to take in the whole freakin’ financial circus.

The stock market always has two competing narratives. One is tragedy, where 8,000 retail investors lose their money in a property scheme that only a credit bubble could love. The other narrative is comedy. And here we should clarify something.

There’s nothing strictly funny about people losing money. It’s un-Christian and unbecoming to take pleasure in anyone else’s misfortune. But from a strictly historical perspective, you have to admit it’s kind of amusing to see how financial markets come up with ways to separate people from their money. It happens every time in every bubble. Each bubble resembles other bubbles in the bubbly phase, but each pop causes mass unhappiness in its own unique way.

In any event, our sense of things is that this melt-up can continue on a lot longer than you’d expect. It has to do with the global dollar peg. Japan and China are the key players. Both countries have monetary policies which virtually guarantee cheap credit creation. Japan keeps interest rates low and its currency cheap. This leads to all sorts of global carry trades that result in higher asset prices.

And China, well, China’s dollar peg has more global consequences than we could explore in a week’s worth of Markets and Moneys. But the main one is simple: as long as China’s currency remains artificially weak relative to the U.S. dollar, China will rack up huge foreign currency reserves that need to be invested somewhere. These reserves, coupled with other foreign exchange reserves and “sovereign wealth funds,” are like a big wet and sloshy global slush fund for stock prices.

That is the dominant market narrative right now. It’s the one investors implicitly believe as they buy stocks and indexes worldwide make new highs. Sam Rayburn, former Speaker of the U.S. House of Representatives used to explain how things worked in Washington this way, “To get along, go along.” It meant if you wanted to have a career in national politics, you had to follow your party leadership until you had seniority. In markets today, to get along, you have to go long. And if you don’t, well you’re out of luck.

There is another narrative out there, but it’s lurking in the shadows of internet chat rooms. Tomorrow night on Lygon Street at 7pm moviegoers will sit down to a screening of “A Crude Awakening.” It’s a film about the coming oil crash.

Will there be a coming oil crash? Well, it depends on who you ask. Jim Kunstler, author of the book, “The Long Emergency,” says the current world of cheap petrol where we all live in the suburbs and commute via motorways to our jobs is “a living arrangement with no future.”

Is global oil production really peaking at around 85 million barrels per day? We have no idea. But as an investor, we’re willing to have a closer look and see what it all means. It’s been a while since we had popcorn at the show anyway.

Dan Denning
Markets and Money

Dan Denning

Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

Leave a Reply

1 Comment on "Japanese Interest Rates, China-US Dollar Peg Ensure Cheap Credit Flood"

Notify of
Sort by:   newest | oldest | most voted
Joanna van der Drift

Gold is the only safe thing and the increasing value has always been a prelude to calamity.

Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to letters@marketsandmoney.com.au