Exuberance, irrational or not, temporarily rules the day
What's going on? Grave commentators in Asia as well as Europe and the US are warning that the global economy is not out of the woods, that a W rather than V-shaped recovery is in train. Disaster has been avoided but tough times still lie ahead.
On the other, stock prices are rising everywhere, gold is at new records, all commodities are up and even in London property prices have bounced back, and Australia has already started raising interest rates. Is this all just irrational exuberance? Or is the world really getting back to normalcy thanks to official stimulus and the natural buoyancy of Asia?
The answer seems to be that the exuberance is not irrational, but will not last. It is born of two factors: first, relief that the dire forecast of global depression and huge falls in trade volumes which seemed all too possible early in the year have not happened. Trade has at least partially recovered and with it profits. Secondly the sheer size of both monetary and fiscal stimulus unleashed everywhere as governments in the west have filled up gaping holes in bank balance sheets and those in China, India and most of Asia have pushed out huge fiscal stimulus whether to spur consumers or build infrastructure.
Money has to go somewhere and money supply everywhere has been increasing far faster than economies can effectively absorb it. Asset prices rises have been bringing back fears of inflation which in turn drive investors to put even more of their money into real assets. There has been no counterweight in the shape of rising bond yields as governments have been buying their own bonds to keep rates low and support property prices and banks.
Investors who have not been on the bandwagon for the past six months have seriously lost out. And many of those who sold in a panic earlier in the year now feel compelled to get back into markets before they are again overtaken by events.
Australia has had a particularly marked impact on global markets because both of its rate rise and its strong jobs report. Markets were buoyed by the prospect of global growth rather than worried by the prospect of a general rise in interest rates from current abnormally low levels.
But Australia is in several ways rather exceptional. It has benefited both from massive fiscal stimulus made easier by a strong fiscal position with a faster than expected recovery in demand for and prices of its export commodities. This has become a virtuous cycle as future inflation fears have risen. A mining investment boom underway before the market crash has been slowed but not stopped thanks in large part to China's interest in acquiring mineral assets. The big unknown however is whether China's demand has been fuelled by stockpiling when cash was so easily available and may not reflect final demand.
China's own growth has been impressive but so driven by officially backed, bank-financed infrastructure spending that its durability is in doubt. Recovery in China's exports will help but consumption demand is still inadequate. Inflation concerns are rising in China both at consumer and government level and signal greater caution.
Inadequate domestic demand remains a problem for much of Asia still hooked on exporting to the west. As a result, global trade imbalances remain huge.
The surpluses of the oil exporters have shrunk but not those of the countries best equipped to stimulate domestic demand. It remains to be seen whether the latest falls in the US dollar will have any significant impact on US import demand but Asia is mostly resisting the currency appreciation which is needed to stimulate consumption.
Dollar weakness has impacted the euro and yen but China continues to keep its currency closely aligned to the dollar and others such as the won, ringgit and NT dollar have appreciated by only small amounts compared with pre-crisis levels. While complaining about the rapid rise in US foreign debt, these countries continue to underpin the dollar by continuing large net purchases of Treasury securities. China's easy money, pegged exchange rate policy have meanwhile been a spur not just to the local asset markets but to Hong Kong and Taiwan too.
Uncertainties about the future, the volatility of exchange markets, the still inadequate resources of the IMF plus the beggar-my-neighbor attitude of China all contribute to reluctance to let currencies appreciate as much as fundamentals suggest. Yet those looking for a sustained revival in western consumption are likely to be disappointed. Europe's demographics are poor and the US consumer looks likely to be in a saving mode for a long time to come. The revival in oil price will add a further burden to the consumer. Once fiscal stimulus abates, the prospects for the US economy are very modest at best.
Meanwhile some countries in Asia also remain constrained by private sector reluctance to invest as well as by caution and lack of viable projects. Malaysia for example continues to run a massive current account surplus, some of which goes into reserves, but much too into private capital outflow. Malaysia's racial politics remain a huge burden. The Philippines desperately needs capital investment but has been seeing net capital outflow by corporations and rich individuals – financed by the remittances of overseas workers.
Uncertain regulations mean Indonesia is not receiving the foreign capital that its economic prospects should be able to attract into mining and utilities. India has been hurt by a poor monsoon and a weak current account.
None of this spells disaster for Asia. But the time is approaching when governments will need to decide whether to keep fiscal and monetary policies loose to spur domestic demand or start tightening – or allowing rapid currency appreciation – to ward off inflation. The longer they delay tightening, the higher asset markets will climb – but the more difficult the subsequent return to stability.
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Terry Lacey
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Exuberance, irrational or not, temporarily rules the day
What's going on? Grave commentators in Asia as well as Europe and the US are warning that the global economy is not out of the woods, that a W rather than V-shaped recovery is in train. Disaster has been avoided but tough times still lie ahead.
On the other, stock prices are rising everywhere, gold is at new records, all commodities are up and even in London property prices have bounced back, and Australia has already started raising interest rates. Is this all just irrational exuberance? Or is the world really getting back to normalcy thanks to official stimulus and the natural buoyancy of Asia?
The answer seems to be that the exuberance is not irrational, but will not last. It is born of two factors: first, relief that the dire forecast of global depression and huge falls in trade volumes which seemed all too possible early in the year have not happened. Trade has at least partially recovered and with it profits. Secondly the sheer size of both monetary and fiscal stimulus unleashed everywhere as governments in the west have filled up gaping holes in bank balance sheets and those in China, India and most of Asia have pushed out huge fiscal stimulus whether to spur consumers or build infrastructure.
Money has to go somewhere and money supply everywhere has been increasing far faster than economies can effectively absorb it. Asset prices rises have been bringing back fears of inflation which in turn drive investors to put even more of their money into real assets. There has been no counterweight in the shape of rising bond yields as governments have been buying their own bonds to keep rates low and support property prices and banks.
Investors who have not been on the bandwagon for the past six months have seriously lost out. And many of those who sold in a panic earlier in the year now feel compelled to get back into markets before they are again overtaken by events.
Australia has had a particularly marked impact on global markets because both of its rate rise and its strong jobs report. Markets were buoyed by the prospect of global growth rather than worried by the prospect of a general rise in interest rates from current abnormally low levels.
But Australia is in several ways rather exceptional. It has benefited both from massive fiscal stimulus made easier by a strong fiscal position with a faster than expected recovery in demand for and prices of its export commodities. This has become a virtuous cycle as future inflation fears have risen. A mining investment boom underway before the market crash has been slowed but not stopped thanks in large part to China's interest in acquiring mineral assets. The big unknown however is whether China's demand has been fuelled by stockpiling when cash was so easily available and may not reflect final demand.
China's own growth has been impressive but so driven by officially backed, bank-financed infrastructure spending that its durability is in doubt. Recovery in China's exports will help but consumption demand is still inadequate. Inflation concerns are rising in China both at consumer and government level and signal greater caution.
Inadequate domestic demand remains a problem for much of Asia still hooked on exporting to the west. As a result, global trade imbalances remain huge.
The surpluses of the oil exporters have shrunk but not those of the countries best equipped to stimulate domestic demand. It remains to be seen whether the latest falls in the US dollar will have any significant impact on US import demand but Asia is mostly resisting the currency appreciation which is needed to stimulate consumption.
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