The British economy is teetering on the edge of recession, interest rates are rising, there’s a cost-of-living crisis, yet the FTSE100 index is daily making new all-time highs. Shurely shome mishtake? In a recession, even a shallow one, businesses find it harder to make profits, so share values should fall. Is the stock market deluding itself, and acting like Wile E Coyote, who hasn’t noticed he has run over a cliff until he looks down?
Well, possibly. All sorts of factors push share prices. UK listed companies make much of their profits overseas, and translating into weak pounds makes them look better. UK shares are much less highly rated than equivalents in the US, and recent performance has been flattered by the absence of plunging tech companies. Oil stocks, miners and banks have driven the index to its peak.
Yet a much bigger force has been at work. The Big Beasts in the East have been printing money. The People’s Bank of China has been trying to stave off recession by providing liquidity, while the Bank of Japan has been engaging in its own version of Quantitative Easing, as it strives to support the price of 10-year government bonds.
At this distance, the details hardly matter, except that Matt King, global strategist at Citi in London, estimates around $1 trillion has been pumped into the global system in the last few months. This vast sea of dosh sloshing round the world is more than enough to offset any tightening from the Federal Reserve, European Central Bank or the Bank of England (a bit player in this game).
Even today $1 trillion is a fair amount of money. King estimates that it adds or subtracts about 10 per cent to stock prices round the world, with a 20 basis-point swing for investment-grade credit.
Such enthusiasm with the printing press seems unlikely to last. The BoJ is about to get a new governor, Kazuo Ueda, who has been hinting that his predecessor’s policy of price support may not continue. In the US, there is the slow-burn of the debt ceiling.
This is almost uniquely an American problem. Governments in other countries can borrow as much as they like, or as much as the markets will bear (as we found out the hard way with the Kwarteng Budget). The US has a ceiling, set by congress, and which congress can raise – as long as it votes to do so.
Not for the first time, there’s a stand-off, with Republicans demanding spending cuts in return for not blocking the request to raise the limit. Already the administration is taking steps to hoard money, but observers expect the crunch to come at the end of next month.
Neither the bond nor equity markets seems to be taking the threat of a US default seriously – yet. Investors may believe that a deal will be done, or maybe they believe in the trillion-dollar coin. This quirk in the rules allows the US Treasury the right to mint coins, specifically (since 1996) in platinum in any denomination.
There seems to be no legal obstacle to the Treasury minting a coin with a face value of $1 trillion, depositing it with the Federal Reserve, and asking for dollars in exchange. This is almost too absurd, and Janet Yellen, the Treasury secretary, has ruled it out. But desperate times may need desperate measures. Meantime, Wile E Coyote rules in the markets.
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