- Joined
- Jul 24, 2008
- Messages
- 33,627
- Points
- 0
<TABLE border=0 cellSpacing=0 cellPadding=0 width=452><TBODY><TR><TD vAlign=top width=452 colSpan=2>Published September 25, 2009
</TD></TR><TR><TD vAlign=top width=452 colSpan=2>Stock market rebound best hope for recovery
By NEIL BEHRMANN
LONDON CORRESPONDENT
<TABLE class=storyLinks border=0 cellSpacing=4 cellPadding=1 width=136 align=right><TBODY><TR class=font10><TD width=20 align=right>
</TD><TD>Email this article</TD></TR><TR class=font10><TD width=20 align=right>
</TD><TD>Print article </TD></TR><TR class=font10><TD width=20 align=right>
</TD><TD>Feedback</TD></TR></TBODY></TABLE>
THE global stock market rebound, rather than government pump-priming, is the best hope for sustainable economic recovery in the coming year.
<TABLE class=picBoxL cellSpacing=2 width=100 align=left><TBODY><TR><TD>
</TD></TR><TR class=caption><TD>Think about it: A stronger stock market has gradually boosted economic and business confidence by forcing the doomsters to retreat </TD></TR></TBODY></TABLE>First, a stronger stock market has gradually boosted economic and business confidence, by forcing the doomsters to retreat. Second, it is lowering the cost of capital. Growing numbers of indebted banks and businesses can now bolster their equity capital, by issuing more expensive shares. Moreover, the stock market recovery has encouraged investors to purchase formerly depressed corporate bonds. Their prices have risen and their yields have fallen. Businesses can thus repay borrowings by reissuing debt at lower interest rates.
The quoted equity market has an influence on private non-quoted companies, as it is the marker for medium and long-term finance. Businesses struggling to get money at reasonable rates from reluctant banks now have a better chance of obtaining alternative finance from private equity and venture capital funds.
These developments have laid the foundations for a global business recovery and an improvement in world trade.
Moreover, economic data shows that individuals are doing their utmost to reduce their debt, another healthy long-term development. Much has been written about rising unemployment and relatively low consumption being a drag on economic growth. On the other side of the equation, if 10 per cent of workers are unemployed, the remaining 90 per cent are working, earning money and spending. As business conditions improve, unemployment should eventually peak and slowly abate.
Both bears and bulls are alarmed by the speed and extent of the global stock market recovery since their lows in March this year. They have forgotten that the irrational exuberance of 2007 became irrational gloom after the Lehman Brothers crash in September last year.
Shares slumped by 30 per cent or more within weeks. Investors panicked, assuming widespread losses and bankruptcies. Several companies have experienced trauma and more will follow, but the gloomster forecast of a 1930s type depression has not occurred. The probability of it happening is low.
It is thus not that surprising that the US S&P 500 index, now around 1,070, has soared by 57 per cent since March. Recall that just prior to the Lehman crisis, the index was around 1,200 points and then slumped to 680 points.
Market participants should be wary at most about the most recent 20 per cent increase. The historical earnings yield of the S&P 500 (inverse of the price earnings ratio) is 5.9 per cent and the dividend yield is 2.4 per cent. This is hardly exciting, but yields of 10-year US Treasury bonds are only 3.5 per cent, long-term US inflation index bonds 2.2 per cent and one-year US commercial deposit rates 0.9 per cent. Property yields are low and real estate is illiquid.
So in relative terms, equities are not overvalued, assuming a slow, gentle earnings rise. To be sure, investors should discard the obsession with indices and pick good value stocks and take profit on others.
Of course, there are market risks from now onwards. Besides an unpredictable geopolitical event, the greatest danger for the global economies comes from government economic policies and central bankers, especially in the US, UK and China. These are notably Keynesian measures of excessive government borrowing to spend on infrastructure and other projects, and so called 'quantitative easing' - a euphemism for money printing.
Infrastructure is important, but national and local governments tend to waste and misallocate money.
US dollar weakness and the gold price are reflecting market uncertainty about the intentions of Federal Reserve Board chairman Ben Bernanke and US Treasury Secretary Timothy Geithner. Markets are aware of their poor track records. The British pound is weak because of disenchantment with the government and Bank of England. China's command economy is creating speculative bubbles in local property, equity and commodity markets. The European Central Bank is behind the curve. Asians holding currencies linked to the US dollar are taking risks if they buy a sky-high euro which is currently only 9 per cent below its all time 2007 bubble high. The US and Asian economies are much stronger than their European counterparts.
Ahead of the G-20 meeting in Pittsburgh, the authorities and press were focusing on bank bonuses and hedge funds. Instead, they should be worried about the potential failure of governments and central banks to reverse policies that could create severe problems, eg inflation and mal-investment, from 2010 and 2011 onwards.
The authorities are so far extremely lucky that the US Treasury bond market and the US dollar have not gone into a tailspin. Such moves could easily scuttle the global equity market rally, causing a reduction in confidence and a reversal of the fragile upturn of the private economy. The hope now is that governments will become as prudent as the private sector and begin to reverse quantitative easing and cut their borrowing and huge fiscal deficits. Keynesians are protesting in horror at such a plan, as they fear that public spending cuts will send economies into a renewed tailspin.
But the current government policies have created huge uncertainty as the growing debt and interest bills will eventually result in higher taxation. That worry could crimp business investment and hence economic growth.
</TD></TR></TBODY></TABLE>
</TD></TR><TR><TD vAlign=top width=452 colSpan=2>Stock market rebound best hope for recovery
By NEIL BEHRMANN
LONDON CORRESPONDENT
<TABLE class=storyLinks border=0 cellSpacing=4 cellPadding=1 width=136 align=right><TBODY><TR class=font10><TD width=20 align=right>
</TD><TD>Email this article</TD></TR><TR class=font10><TD width=20 align=right></TD><TD>Print article </TD></TR><TR class=font10><TD width=20 align=right></TD><TD>Feedback</TD></TR></TBODY></TABLE>THE global stock market rebound, rather than government pump-priming, is the best hope for sustainable economic recovery in the coming year.
<TABLE class=picBoxL cellSpacing=2 width=100 align=left><TBODY><TR><TD>
</TD></TR><TR class=caption><TD>Think about it: A stronger stock market has gradually boosted economic and business confidence by forcing the doomsters to retreat </TD></TR></TBODY></TABLE>First, a stronger stock market has gradually boosted economic and business confidence, by forcing the doomsters to retreat. Second, it is lowering the cost of capital. Growing numbers of indebted banks and businesses can now bolster their equity capital, by issuing more expensive shares. Moreover, the stock market recovery has encouraged investors to purchase formerly depressed corporate bonds. Their prices have risen and their yields have fallen. Businesses can thus repay borrowings by reissuing debt at lower interest rates. The quoted equity market has an influence on private non-quoted companies, as it is the marker for medium and long-term finance. Businesses struggling to get money at reasonable rates from reluctant banks now have a better chance of obtaining alternative finance from private equity and venture capital funds.
These developments have laid the foundations for a global business recovery and an improvement in world trade.
Moreover, economic data shows that individuals are doing their utmost to reduce their debt, another healthy long-term development. Much has been written about rising unemployment and relatively low consumption being a drag on economic growth. On the other side of the equation, if 10 per cent of workers are unemployed, the remaining 90 per cent are working, earning money and spending. As business conditions improve, unemployment should eventually peak and slowly abate.
Both bears and bulls are alarmed by the speed and extent of the global stock market recovery since their lows in March this year. They have forgotten that the irrational exuberance of 2007 became irrational gloom after the Lehman Brothers crash in September last year.
Shares slumped by 30 per cent or more within weeks. Investors panicked, assuming widespread losses and bankruptcies. Several companies have experienced trauma and more will follow, but the gloomster forecast of a 1930s type depression has not occurred. The probability of it happening is low.
It is thus not that surprising that the US S&P 500 index, now around 1,070, has soared by 57 per cent since March. Recall that just prior to the Lehman crisis, the index was around 1,200 points and then slumped to 680 points.
Market participants should be wary at most about the most recent 20 per cent increase. The historical earnings yield of the S&P 500 (inverse of the price earnings ratio) is 5.9 per cent and the dividend yield is 2.4 per cent. This is hardly exciting, but yields of 10-year US Treasury bonds are only 3.5 per cent, long-term US inflation index bonds 2.2 per cent and one-year US commercial deposit rates 0.9 per cent. Property yields are low and real estate is illiquid.
So in relative terms, equities are not overvalued, assuming a slow, gentle earnings rise. To be sure, investors should discard the obsession with indices and pick good value stocks and take profit on others.
Of course, there are market risks from now onwards. Besides an unpredictable geopolitical event, the greatest danger for the global economies comes from government economic policies and central bankers, especially in the US, UK and China. These are notably Keynesian measures of excessive government borrowing to spend on infrastructure and other projects, and so called 'quantitative easing' - a euphemism for money printing.
Infrastructure is important, but national and local governments tend to waste and misallocate money.
US dollar weakness and the gold price are reflecting market uncertainty about the intentions of Federal Reserve Board chairman Ben Bernanke and US Treasury Secretary Timothy Geithner. Markets are aware of their poor track records. The British pound is weak because of disenchantment with the government and Bank of England. China's command economy is creating speculative bubbles in local property, equity and commodity markets. The European Central Bank is behind the curve. Asians holding currencies linked to the US dollar are taking risks if they buy a sky-high euro which is currently only 9 per cent below its all time 2007 bubble high. The US and Asian economies are much stronger than their European counterparts.
Ahead of the G-20 meeting in Pittsburgh, the authorities and press were focusing on bank bonuses and hedge funds. Instead, they should be worried about the potential failure of governments and central banks to reverse policies that could create severe problems, eg inflation and mal-investment, from 2010 and 2011 onwards.
The authorities are so far extremely lucky that the US Treasury bond market and the US dollar have not gone into a tailspin. Such moves could easily scuttle the global equity market rally, causing a reduction in confidence and a reversal of the fragile upturn of the private economy. The hope now is that governments will become as prudent as the private sector and begin to reverse quantitative easing and cut their borrowing and huge fiscal deficits. Keynesians are protesting in horror at such a plan, as they fear that public spending cuts will send economies into a renewed tailspin.
But the current government policies have created huge uncertainty as the growing debt and interest bills will eventually result in higher taxation. That worry could crimp business investment and hence economic growth.
</TD></TR></TBODY></TABLE>
