Stock markets around the world are booming.
Headlines include: “Australian stock market hits record
high but economy still flaky”; “US stocks surge to a record on blockbuster tech earnings”;
and “S&P 500 and Nasdaq finish week at record high”.
Here’s the Australian All Ords.
Boom!
We haven’t see highs like these since 2007 (just before the Global Financial Crisis of
2008).
Its previous record was 6873.20 set on 31 October 2007.
Now it’s at 6879.30.
Here’s America’s S&P500.
Boom!
It’s now at 3025.86.
That’s an all-time record, right?
How about the tech-heavy NASDAQ?
Boom!
8,330.21 — an all-time record.
What’s going on here?
While the economy is struggling around us, why are stock markets surging?
A London-based stockbroker was quoted as saying, without a hint of irony or incredulity,
“Global equities rallied after the International Monetary Fund cut the global growth outlook
to 3.2% in 2019, which would be the lowest growth rate in a decade.”
So because the IMF cut the global growth outlook to its lowest rate in a decade, stock markets
went up?
What sort of topsy-turvy world are we living in?
In 2008, the global financial system was on the brink of collapse.
It was a crisis caused by a catastrophic debt build-up in America's housing market.
When it went pop, it brought down the world’s financial markets along with it.
The house of cards came tumbling down.
Since then, Central banks around the world have sent interest rates to zero in order
to try to spur on the economy.
We can see in this chart that since the GFC, central bank debt in Japan, China, Europe,
and the United States has more than doubled!
They fear another financial crisis and they will do almost anything to avoid one.
How long can this go on?
How long can free markets be so easily manipulated convincing investors into believing that this
ride will continue on indefinitely?
Other headlines are questioning these highs; “Four flashpoints that may unsettle booming
stock markets in the coming year”; “Passive investing boom could be causing a market bubble,
but not in the stocks you would expect”; “The stock market could be in for a ‘VIXplosion’,
says widely followed strategist Sven Henrich”.
In late 2018, American and European central banks were banking on a global recovery where
healthy inflation would wipe away the debt and interest rates would rise.
The recovery was only very fragile, however, and since then, any hopes have been dashed.
Low interest rates are here to stay, so says the Reserve Bank of Australia’s Governor,
Philip Lowe.
Things are so dire in the Australian (and world) economy that most predict that the
RBA will cut rates at least once more this year.
“Savings rates hit rock bottom amid signs of further spending restraint”; “Commonwealth
Bank joins major banks in slashing savings rate”.
What do investors do when interest rates are this low and they can’t make money from
bank savings?
They pile into the stock market, of course!
Low interest rates are great for stocks.
The rise of ETFs has had a profound effect on how people invest.
(I’ve made videos about ETFs myself).
As State Street Global Advisor’s executive vice president Jim Ross recently said,
“An ETF allows you to be diversified with one trade.”
The ETF industry is growing assets by around 30% a year.
Vanguard ETFs are officially a $1 trillion business.
Because of under-performing fund managers, investors are being pushed towards exchange-traded
funds.
Critics of passive investing argue it could be causing a market bubble.
But what else can investors do?
Interest rates are low.
Fund managers aren’t performing.
Property prices are falling.
Of course investors will pile into the stock market causing the record highs that we are
seeing today.
What can go wrong?
A lot!
A growing Chinese debt crisis.
A Brexit debacle.
Potential military conflicts.
Trade wars.
But the question remains…
Should you be investing in the stock market?
I don’t know.
And I don’t think anybody knows.
But one thing that I can pretty much guarantee you is that central banks around the world
will continue pushing deeper into experimental monetary territory to keep this facade in
place.
Nobody wants another global financial crisis, and central banks will stop at nothing to
avoid one.