“Central banks have created a debt-fuelled ‘Ring of Fire’, and we will no doubt have felt many tremors (large and small) as a result, by the time my next 6-monthly update appears in September“.
That was my forecast for world stock markets back in March, and I imagine few would argue with it today, as we review developments since then. Central banks have spent almost $25tn since the Crisis began in 2008 in the belief they could kick-start global recovery by boosting asset markets, particularly stock markets. As then US Federal Reserve chairman Ben Bernanke explained in November 2010:
“Higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.”
Today, 5 years later, it is hard to see why the policy was adopted. It was meant to be a temporary support, whilst economies recovered. But instead it has become semi-permanent, with the world’s major financial organisations now warning against even a 0.25% US interest rate rise next week:
- The IMF says “a rise risks adding to the growing economic and political threats to US growth“
- The World Bank says the global economy is so weak, it could cause “panic and turmoil” in emerging markets
What was the point of spending all this money, and building up so much debt, to have achieved so little?
Even in stock markets, the impact has been underwhelming, as the chart above highlights, showing the percentage change in major financial markets since their pre-Crisis peak:
- The best performer is the US 30-year bond, up 38%, as investors focus on the risks of deflation
- Germany’s DAX is up 26% as a ‘safe haven’ from the Eurozone crisis
- The US S&P 500 is up 24% – but has fallen 6% since my March update, with the IMF warning that prices ”are approaching levels that may be hard to sustain given profit forecasts“
- BRIC member India is up 23%, but down 13% since March as premier Modi’s reform programme seems to stall
- Japan has seen zero growth, despite its $480bn/year stimulus and 50% devaluation versus the US$
- The UK is down 8% as its London housing bubble starts to burst as foreign buyers rush for the exits
- The other 3 BRICs were supposed to lead the world out of recession – but Brazil is down 37%, China down 48% and Russia down 68%
Today’s globally ageing populations and falling fertility rate are inevitably having a major impact on the economy. But unfortunately, politicians have wanted to believe that printing money would somehow change the fact that the BabyBoomer-led demographic dividend has now become the demographic deficit of the future.
Financial market developments over the past 6 months are warning us that we will all pay a heavy price if this wishful thinking continues to dominate economic policy.