Charts: Stock Market Boom Bust Cycles and Interest Rates

I’ve been saying that stock market boom bust cycles have principally been driven by manipulations of interest rates or as consequence to interest rate policies by central banks.

Here are some charts to exhibit their correlations

Going into the close of 2012, this year’s crown holder as the best stock market performer has been Turkey whose main benchmark has been up by nearly 50% (as of last Friday’s close).

[Note: I excluded Venezuela's case since her stock market's nearly 300% gains appear as part of the symptoms of a brewing hyperinflation]

Like the Philippines, Turkey’s central bank has aggressively been pruning interest rates. Most of which has been implemented during the third quarter of the year which has coincided with the last quarter spike for Turkey’s stock market.

Asia’s uncontested star: Pakistan has been up by almost 50% (as of last Friday’s close) and has been in a spitting distance with Turkey.

Pakistan has also been in an interest rate cutting spree since 2011. This year, particularly during the last half, Pakistan’s central bank serially trimmed interest rates to a 5-year low.

Mexico hasn’t been in the roster of this year’s best (up by about 17% as of Friday), but since her bellwether trades at record highs I included this.

All three shares some common characteristics

1. Bold reduction of interest rates have spurred stock market booms

2. When interest rates have been marginally raised, stock markets consolidated

3. When interest rates have been significantly raised, stock markets decline meaningfully (as depicted in 2008).

One of Asia’s laggards Bangladesh’s Dhaka down by 20% this year, shows of the other half of story above…

Since Bangladesh began tightening in January of 2011, which I featured here, her stock market has lost nearly half from peak to-trough

Note: All charts above from tradingeconomics.com

Inflationary booms create the misimpression or the illusion of prosperity (which are adapted by governments for political reasons), but in reality they are unsustainable for the simple reason that they signify as unsound economic policies.

As the great economist and professor Ludwig von Mises admonished,

But increases in the quantity of money and fiduciary media will not enrich the world or build up what destructionism has torn down. Expansion of credit does lead to a boom at first, it is true, but sooner or later this boom is bound to crash and bring about a new depression. Only apparent and temporary relief can be won by tricks of banking and currency. In the long run they must land the nation in profounder catastrophe. For the damage such methods inflict on national well-being is all the heavier, the longer people have managed to deceive themselves with the illusion of prosperity which the continuous creation of credit has conjured up

And another thing…

China’s Shanghai index has rallied markedly yesterday to erase her year to date losses.

Going into China’s stock market boom bust cycle-interest rate policies, we see the same story playout