Bull Market in Schadenfreude
11/18/2010 12:43 pm EST
Observe how Federal Reserve bond purchases, which we were warned would inflate markets beyond all recognition, have now been discounted as nearly irrelevant by investors seeking safety in the lowly US dollar.
Yes, it’s a real three-ring circus out there, complete with clowns who think the Fed should quit worrying about 10% unemployment and do something about inflation, no matter how low it is—and even though it’s headed lower.
Last week’s G-20 summit in Seoul confirmed China as the coolest kid on the global block and cold-shouldered the US the way one might a has-been bully. It would be adding insult to injury to point out that the mere rumor of an interest-rate hike by the People’s Bank of China has, so far, proved more potent than $600 billion in monetary easing by the Federal Reserve.
But if China’s doing so great, why is its stock market down 10% in a week? It is because the People’s Bank has presided over a credit orgy that would make Alan Greenspan blush, and now has belatedly spotted the resulting price pressures and asset bubbles. The rest of the Chinese government is on the case as well, trying to keep spiraling commodity costs in line with price controls, subsidies, and an administrative crackdown on “speculation.”
This was repeatedly reported as the cause of the plunge in commodity prices--which seems strange, because Beijing doesn’t control global market prices, especially for commodities that China buys in bulk and cannot do without. Cost controls and subsidies are actually bullish for commodities, because they tend to prop up demand. So is the fact that Beijing has no appetite for an economic slowdown nasty enough to put a real dent in domestic consumption.
China’s recent troubles are a walk in the park next to the crisis confronting the other persistent critic of US economic policies. Having sparked the European rout by unraveling the implied guarantees for sovereign debt, Germany finds itself in the embarrassing position of begging, with the rest of Europe, to bail out Ireland.
The Celtic kitten has lots of bad bank debt, but no need to borrow again for six months. Its predicament (and Germany’s hectoring) is spooking holders of Greek, Portuguese, and Spanish bonds. So, too, are early indications that the austerity prescribed in Berlin is not working out as intended for Greece, as the belt-tightening drives down tax revenue. Go figure!
Who’s had a good week? Why, the Fed, of course. The sell-off in commodities and stocks has taken off the table perhaps the greatest risk of quantitative easing: that it would quickly inflate the mother of all bubbles as markets came to be viewed as a one-way street. And while bond yields have spiked, the economy doesn’t look strong enough to support further increases. The trickle of money that has exited fixed income so far might go right back in, after this refresher course on the downside risks in other asset classes.
On the other hand, the commodity-heavy All Ordinaries index in Sydney is down less than 4% from the six-month peak hit earlier this month, hardly the stuff of nightmares. The high-yielding blue chips advocated by Chris Gilchrist also haven’t given up much ground.
Neither has the gold miner recommended by Timothy Lutts. And while Europe was imploding, China deflating, and the talking heads on TV hyping fear, the cable operator favored by Gordon Pape and Irwin Michael has been on an absolute tear, rallying more than 12% since November 4th. Canadians, at least, don’t seem to be panicking. Their cool heads and commodities should serve them well, no matter what happens to Ireland.