Are rising asset prices really a sign of economic health? Not in Zimbabwe. That godforsaken nation has the fastest rising stock market on earth, but its economy is a basket case. The only thing you can do there is speculate in stocks. Who wants to build a factory in Zimbabwe? Who wants to invest in an oil refinery? Who even wants to plant trees? No one. So everyone buys stocks.
In America, up until the 1970s…or 1980s…the economy was pretty healthy. Stock prices reflected, in a rough way, corporate earnings. Art, property, collectibles and other assets rose, more or less, along with the economy itself. For every dollar in goods and services Americans bought from foreigners, they sold about another dollar’s worth to them.
But what is happening now? The Dow remains near an all-time high. It rose again yesterday. Other asset markets are going wild. Is this because the underlying economy is so strong? Or is it because there is just so much money around with nowhere else to go?
Is the US economy more like the Chinese economy…or more like the Zimbabwean model?
In the West, even the fleetest industry seems to be running out of energy. Bear Stearns (NYSE:BSC) and Goldman (NYSE:GS) announced disappointing results – thanks to their exposure to subprime mortgages.
Bear said its profits were off 10%. Goldman showed rising profits, but investors sold off the stock anyway; they expected more. Freddie Mac (NYSE:FRE) announced a US$211 million loss for the first quarter.
The financial industry depends, first and foremost, on cheap and easy credit. Yet, the long bond is pushing mortgage rates up. Switzerland, a source of ultra-cheap money for many years, raised rates to a six-year high. The European Central Bank, too, made the front page of the IHT by hiking its key lending rates.
What to make of it? We don’t know, but right now, rising interest rates are like a javelin – aimed right at the biggest bubble the planet has ever seen.
Markets and Money