Around the Globe 05.02.2013
Since the GFC, the Aussie has been in a bull market. Increased Chinese economic activity raised demand for Australian commodities, but the Aussie is also the recipient of capital market flows as it is now considered a hard currency. Commodity price have been plunging, but cheap central bank liquidity will keep the Aussie over parity until the Bank of Australia cuts interest rates to match the easing of its counterparts in the U.S., Japan, England, Europe and Rigel 4.
The Fed "worries" that inflation is too low, because it needs political cover to engage in its money printing program. The real reason to induce asset price inflation is to make TBTF banks and wealthy people who own all the assets happy, but the reason the Fed gives for this policy is to heal the labor market. Cheap money will always find a bubble to inflate, but it is of little help in raising the demand for labor.
As this round of QE wears off and markets begin to sputter, the Fed will point to the labor market and low inflation and use these as reasons to embark upon QE5 and raise the amount of monthly purchases.
A few months ago, the marketing meme spewing forth from the maw of Wall Street and repeated breathlessly by the mainstream media was the Great Rotation. This never materialized, but stocks have kept rising anyway. The Street couldn't be bothered to create a new marketing campaign for the sheeple, so it is just recycling the rotation one from the winter.
Stocks will continue rising, but it will not be because of a rotation. The world central banks are buying their sovereign bonds from the TBTF banks who in turn invest the money in other asset markets creating bubbles. As long as this policy continues to be used and is effective, asset prices will keep rising. I predict that it will continue this way until it doesn't.
This story is interesting, because it continues a theme that we touched upon early in the week. Rising housing prices are only good for people about to sell their homes. Buyers must spend more on the price of the house leaving less money for other consumption, and people happy in their homes must pay higher property taxes on their paper wealth. The mainstream media calls it a housing recovery, but I call it inflation.
The TBTF banks are buying houses, bundling them into funds, and selling them to investors. As the homes are sold, the investors supposedly will reap gains. If this is such a good deal, why aren't the banks retaining the business for themselves? Does it have anything to do with the fact that people cannot afford to buy at a price that will earn the fund a profit?
Monetary easing will raise European asset prices, as the charts above show. Note the spike after 3PM. As we said above in regard to the current Fed policy, the easing will not raise demand enough to prompt economic growth and lower the unemployment rate. TBTF banks, corporations and the wealthy will do okay as asset prices surge higher, but Sean, Jean, Juan, Ioannis and Giovanni will remain on the dole with shrinking benefits.
Hanlon's razor is succinctly stated as, "Never attribute to malice that which is adequately explained by stupidity." People are looking for a conspiracy here, but they will not find one. Cypriot banks did not have a deal with Greece or the troika to support GGB prices. They just thought that the Eurozone would guarantee Greek debt and made very poor investment choices based on this assumption. The moral of the story is that you should never ASS U ME.
The labor market remains in a shambles, and, yet, unemployment claims continue to fall. Less people filing for unemployment insurance indicates that the labor market is bottoming out. Until people are able to find jobs for which their education and training qualifies them for, then we have a bad labor market despite what the claims and unemployment rate are.
The Euro is a very good deal for Germany. It is saving billions in borrowing costs, and the artificially low currency fuels it export machine as the charts show above. Too bad Germany won't share its good fortune with the periphery. If the PIIGS were smart, they would act together and threaten to leave the common currency in order to get a better deal. It's called leverage, and if you don't have it, then the other guy does.