Saturday, January 05, 2013

Quote of the Day: Central Banking Heroics Produced a Parallel Universe in 2012

Central banks proved, once again, the world’s hero.  Heightened fears that global central banks had largely expended their bullets were supplanted with childlike enthusiasm that they essentially retain unlimited ammunition.  And with traditional inflationary pressures well contained throughout much of the world, the view held that there was essentially little risk associated with extraordinary monetary stimulus.  Whether it was Europe, the U.S. or Japan, the risk vs. reward equation was viewed as strongly supporting aggressive central bank reflationary measures.  Along the way, global risk markets decoupled from fundamentals.  A critical facet of the “right tail” scenario unfolded before our eyes:  the historic Bubble strengthened and broadened – global risk market prices inflated and risk premiums deflated - even as the economic backdrop turned increasingly problematic.

The U.S. economy and corporate profits disappointed in 2012, while stock prices posted the strongest gains since the policy-induced rally of 2009.  The German economy disappointed, although slightly positive GDP equated with a 29% gain in the DAX equities index.  The French economy badly disappointed, so the CAC40 was limited to just a 14.6% advance.  The Italian economy faltered, yet stocks were up almost 8%.  Spain was a near disaster; stocks fell a mere 5%.  

The big divergence between fundamentals and stock prices was not limited to the U.S. and Europe.  India’s growth slowed sharply, while the Sensex Index gained about 26%.  The South Korean economy disappointed, although stocks almost posted double-digit gains.  Eastern European economies nearly fell prey to the European crisis, although most equities markets posted big advances for the year.  In Latin America, Brazil’s economy slowed markedly, although stocks gained 7%.  Argentina became a bigger mess, yet stocks were up 15%.  The resilient Mexican economy spurred a 17% advance in the Bolsa Index.

It is well worth noting the 2012 dynamic where growth slowed in the face of ongoing Credit excesses.  In this regard, Brazil and India were notable among major economies demonstrating late-cycle Credit dynamics.  In the “old days,” the confluence of rampant Credit expansion and waning economic expansion would have provoked destabilizing capital flight – and a rather abrupt end to booms.  But the new world paradigm is one of unlimited “quantitative easing” and currency devaluation from the world’s major economies.  This global Bubble Dynamic sees unleashed central banks promoting unleashed “developing world” Credit systems.  
This is from last week’s Credit Bubble Bulletin outlook by fund manager and outstanding financial analyst Doug Noland at the PrudentBear.com

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