Will this Manic Stock Market Rally End in Tears?
Can the stock market completely ignore these changes and keep powering higher on the fumes of Mario Draghi’s promises?
Judging by October’s rocket launch, the stock market is back to where it should be, i.e. in rally mode. Yee-haw! All it took to keep the party going was another rate cut in China, another “whatever it takes” assurance from Mario Draghi and blowout earnings from a few tech giants.
So we seem to be right back we we’ve been for seven years: more central bank easing triggers more stock market mania, and stock buybacks and “earnings surprises” push stock valuations ever higher.
But a couple of things have changed recently:
1. China’s expansion has ground to a halt. China’s insatiable demand for commodities and capital has pulled the global economy’s cart for seven long years. Now that this demand is faltering, there is no equivalent economic/financial engine of demand to replace it.
2. Income for the bottom 90% in the developed world is stagnant/declining.The most basic assumption of central bank monetary policies since 2008 (QE, etc.) was that household income would rise as the economy recovered, enabling more household consumption/debt.
This has not turned out to be true: for a variety of structural reasons, income of the bottom 90% of households has actually declined since 2000 when adjusted for official inflation.
3. The “wealth effect” from boosting global stock and junk-bond markets has been very limited. The second basic assumption of central bank monetary policies since 2008 was that the rise in financial assets (stocks, bonds and real estate) would “trickle down” to households who would respond to the psychological sense of increasing wealth by borrowing and consuming more.
What actually happened was the assets of the bottom 90% were gutted in the crashes of 2000-02 and 2008-09 and in many cases never recovered.
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