The fast few days would probably leave a man in disbelief. Disbelief in the laws of nature, in rational judgments, in all the finance theories created, twisted, accepted, rejected in history. However, the group of people affected most were the ones who would sing in favor of reality, righteousness, ones true on the ground as well as off it. Like the Priory of Sion which was formed to protect all descendant of Jesus Christ, they take are the ones who take the responsibility to protect and preach the truth and guard it against all evils. These people now are very much the economists criticizing central banks around the world, analysts in the industry telling you and me that the current stock market rally in this month of September is not going to last and some short sellers too.
These men are perhaps right in what they say. The Federal Reserve in the US, the ECB in Europe and their friend in Japan have been literally printing as much money as they will in the last few months. September 2012 is perhaps the greatest month of them all. Fed and the ECB virtually gave unlimited money printing commitments warranting the state of the economy. Ben Bernanke was ridiculously clear in what he sought from this. The guy has spent his entire academic career studying the Japanese crises- a lost decade, surely his credibility should be some worthy to rely on. However, he does blatantly state that central banks do not alone solve the underlying economic problems and the main action needs to come from the government and the people of the country. One highlight in his defense of his action was that money printing props up stock markets. People make money, feel richer and start spending, thus kick- starting the economy. I don’t really get some logical explanations to support this hypothesis. However, markets in this month sure agree with gains between 5-10% so far. Short sellers were probably right in their action the sell, sell and sell, until these godfathers stepped in. Nothing underlying has changed. Spending, Production, investor confidence, reforms, trade continue to fall. Solution to a lot of debt is not more debt. However, the stock markets say, ‘Don’t fight the FED’. Legendary investor Warren Buffet quotes, ‘The market can stay irrational for longer period than you and me can stay solvent’. Evident enough from the fate of short sellers in this month. Hence, investors need to stay cautious in picking stocks and not getting swayed by this ‘Tiger rally’. Good stocks, bad stocks, OK stocks, not so OK stocks, all perform in the liquidity driven rally. However, sooner or later, market does get its focus back on the underlying realities of the economy. Since nothing concrete in terms of economic development has taken place in the past few quarters, it is rational to think the money glow will start to fade and markets will tread lower from current levels given central banks do not infuse more money. One can only know who’s been swimming naked when the tide passes. This took place every time after each easing action by the Fed and the ECB. Also, the returns have been diminishing with each progressive quantitative easing with time.
In this world of fiat currency, central banks can print money till infinity squared. However different asset classes do not respond the same way to these actions. Like the Japanese central bank’s never ending easing program with inflation in control, Bonds are the best bet to earn money. Since growth and a healthy inflation hardly returned to Japan, Equities and commodities have been the underperformers. In hope of growth and unprecedented exuberance created by the recent printing, Equities are the best bet if the world economy does manage to solve all problems and return to growth. On the contrary, there is a good chance that nothing will change by these artificial try-outs and so much money could risk inflation, even hyper-inflation. In such a world where these guardians of monetary policy lose control, investing in commodities and precious metals like gold would prove to be a masterstroke. Perhaps, it would be best for analysts round the globe to stop forecasting corporate profits. Instead try decoding hints and forecast actions of the central banks world over.
- Vishal Agarwal