Wall Street breathed a sigh of relief yesterday as the Fed confirmed that ultra-low interest rates would continue for ‘an extended period’, generally thought to be over six months, and rumors of a rate rise once again proved to be greatly exaggerated.
Some kind of a relief rally might be anticipated over the next few days. But there is also a contrarian view that says all the good news is now priced into the market.
Certainly the chart from last March shows a picture of a strong initial recovery, a flatter upturn later in the year and then a dome pattern. Breakouts might now indicate another leg up but the deteriorating quality of news suggests this may not follow.
The Chinese monthly purchasing managers’ index showed its smallest expansion in manufacturing activity in a year. Meanwhile, a hike in inflation has put Chinese savers into negative real interest rates. An inflection point seems close in the Chinese economy with a scaling back of last year’s colossal stimulus package.
Then again the European Union lifeline for Greece is just the first in a long queue, with Spain a much larger problem and other indebted nations also in need of a bailout. Business is not good in Europe. Germany just published revised figures showing a heart-stopping 17.9 per cent fall in exports in 2009, with China taking over its position as the world’s biggest exporter.
Czech retail sales declined the most in four months in February. Spanish home prices fell for the ninth quarter in a row through December. Japan is caught in a debt trap. The UK and USA are facing possible loss of their triple-A credit ratings. US housing and auto sales are way down.
None of this supports the V-shaped recovery thesis now priced into global stock markets. The world economy has fallen into a trough and shows very little sign of being able to dig itself out anytime soon.
Where is the magic catalyst to make it happen? Interest rates can hardly go any lower. Government spending causes more debt and is ultimately a burden on an economy, draining money from far more productive private enterprise.
No a further shake out of asset prices to reflect the reality of a world of falling profits over a number of years, and a series of further economic shocks is inevitable. Try to present the reverse argument and you really struggle because there is no credible counter view.
Disclosure: Author holds a long position in the US dollar