Stock Market Floats on a Mirage of Cash as the Global Economy Sinks

Hearing what the markets and the economy have to say is like listening to two different conversations about the same thing. Both are talking loudly and confidently but neither is listening to each other. It’s like two blokes at a pub – who support different teams – talking about a game of footy. At first the conversation is rational. Then, after a few beers, the blinkers come down and each person can only see the merits of their own position. And as time goes on, they defend their position ever more raucously.

Government bond yields around the world are at historically low levels. This is despite the fact that one by one, governments are going broke. Bond investors know this but don’t really care. The credit boom and the post-2008 reflation effort created so much ‘credit money’ that it had to go somewhere. In times of economic slowdown, this credit money pours into government bonds, apparently the safest asset class in the market.

While bond markets tell a story of economic paralysis and deflation, equity markets have their own yarn to tell. This is especially so in the US, the world’s largest equity market. Despite an economy dribbling along at a 1.5% growth rate (in the three months to June) the stock market continues to surge.

You know the reason why…the worse the economic news gets, the better it looks for another round of central bank monetary intervention. And the economic news out of the US has been awful in recent weeks. To the interventionists, that just means they didn’t do enough in the first place. ‘See’, they say, ‘we need to do more!’

Over in Europe, where central bankers don’t have quite as much latitude, it’s all about talking the talk. You saw on Friday how Mario Draghi, head of the European Central Bank, said something about doing whatever it takes to save the euro…it terrified the short sellers and caused a massive rally.

Central bankers are clearly at war with those taking an opposing view of their power. Europe’s bankrupt national governments blame the short sellers – the ‘speculators‘ – for their precarious financial positions. So their methodological madness involves first banning short selling (in Spain and Italy) then orchestrating a massive ‘squeeze’ to rid these evil speculators from the market.

Of course it won’t work, but it may buy a little of that precious asset – time. Because that’s about all Europe has at the moment.

So we have a global economy sinking into the mire of debt and stock markets floating on a mirage of central bank cash.


Greg Canavan
for Markets and Money

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Greg Canavan
Greg Canavan is a contributing Editor of Markets and Money and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to Markets and Money for free here. If you’re already a Markets and Money subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Markets and Money emails. For more on Greg go here.

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