FYI | Aug 21 2013
By Peter Switzer, Switzer Super Report
Last Friday, when I was interviewing the man who would be Treasurer – Joe Hockey – and a guy who I described in his introduction as “one of the smartest guys in the room” – Mark Carnegie – I was forced to ponder the concerns both men shared.
Their expectation that the expansion of the money supply worldwide “would end in tears” made me question my own current positivity. What lies ahead is my considered view on whether their argument is right.
A different view
Currently taper talk is dominating stock markets. Expect a bit of negativity either when tapering of the QE3 bond buying by the Federal Reserve starts or the signs, plus the quality of economic data, virtually screams out that a more normal stance for monetary policy is needed in the USA.
Normality implies a tighter monetary policy and higher interest rates.
Of course, the commencement of tapering, or the belief that it’s imminent, though likely to hurt stock prices in the short-term, should be trumped by bargain hunters, who see the stock sell-off as overdone and caused by those who would be ignoring the fact that the US economy would be on the mend.
This week, a get together of central bankers at Jackson Hole in the USA could either hurt or help markets, depending on what is said by speechmakers, and there is also the release of the latest minutes of the Fed’s last meeting.
Ben Bernanke won’t be at the Hole and so this reduces the chance of something juicy for the market to digest.
Investor nerves are on edge at the moment after the Dow lost 2.2% last week, which was the worst week in a year. If the minutes suggest tapering is likely to start next month, the sell buttons could be pressed widely on the New York Stock Exchange.
The new top dog
There’s also a lot of housing sector data this week and that’s really important for the Fed’s decision on tapering. And all of this happens as Bernanke’s resignation should be official this month, with his replacement said to be either the Fed’s Vice-Chair, Janet Yellen, or the former Treasury Secretary Larry Summers, who has emerged as a real chance.
Summers is seen as the kind of guy who could want to taper earlier than Yellen, but this is all speculation that does not really affect the big picture all that much, at least for the moment.
Some US experts don’t rule out a 10% stocks slump when tapering starts, but this is guesswork. Most believe my argument that any sell-off will give birth to another stocks surge, pushing the key market indexes higher next year.
That said, I don’t think Bernanke wants tapering to push interest rates too high and cause a big stocks slide, as it would undermine the confidence he is trying to build in the US economy.
The real issue
But any market correction is not what Hockey and Carnegie are fretting about. They think the excessive monetary expansion will lead to inflation, very high interest rates, threatening the very economic growth the policy is meant to stimulate, culminating in a stock market crash! They did not actually say this but when you use the “it will end in tears” line you can only mean this. It’s the only thing worth crying about – market-wise, that is.
Of course crashes often occur –1987, the 2000’s dot com malfunction, and then the 2007-09 GFC, thanks to a silly US sub-prime play by financial institutions. This created a recession in most economies, notably not here, but the worst of the consequences that remain is unemployment of a huge magnitude in Europe.
Right now corporate balance sheets are in good shape, governments have shouldered debt to breathe life into their economies, central banks have let the money supply run loose, consumers are hesitant and are matched by cautious employers.
There is no danger of inflation for a couple of years and it will only show up when economies start to grow strongly, jobs start to be created and consumers return to the shopping malls like there is no tomorrow.
Sure, central banks have been papering over the cracks using dollar bills, pounds and euros, but I think if the economies of the world tread the same path the USA seems to be heading down, then we will see stronger global economic growth before higher inflation and interest rates create the inevitable crash.
The great China hope
There will be tears one day and it will be my job to make the early call on when it looks likely to happen. It’s a tough job but heck, someone has to do it!
Finally, I like the view of Steve Roach – no, not Steve Blocker Roach from the old Balmain Tigers. This Roach was the former Morgan Stanley chairman, who now teaches at Yale and says China will keep growing at 7 to 8%! He says in 1981 the country’s urban population was less than 20% and it is now 52.6% and tipped to be 70% by 2030 and so China needs 100 new cities!
Urbanisation equals modernization, which means demand for what we sell – iron ore, coal and food. It should also mean that China remains the no. 1 source of demand for the world economy and it is that demand and economic growth that can keep inflation at bay. So the tears of Joe and Mark could be delayed even longer than I expect but I am still on a watching brief.
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
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