3 charts to explain what has been happening today.
First is that stock markets have been vigorously rallying across the globe. This means that OECD markets have surged but has underperformed emerging markets.
From the Economist, ``STOCKMARKETS in many countries have risen steeply in recent days, buoyed by signals from central bankers in America and Britain that their economies may now be out of recession. Retail sales and industrial production data released this week appeared to support the sunnier outlook for America, helping the Dow Jones Industrial Average to a peak for the year of 9,791 on Wednesday September 16th. On the same day the FTSE 100 reached 5,140, its highest point since the collapse of Lehman Brothers a year ago. The Nikkei is also climbing mostly upwards. However, most stockmarkets have a long way to go to regain their pre-recession levels." (emphasis added)
Next is that while stock markets have traditionally functioned as a forward indicator of the economy, they appear to have been detached from economic reality.
Despite some signs of improvements, some major economic indicators such as foreign direct investments (FDI) have deteriorated in the face of rising stock markets.
According to the Economist, ``FOREIGN direct investment has fallen sharply since the start of the financial crisis, according to the latest World Investment Report from UNCTAD. The purchase of factories, buildings and other assets by foreign firms was hardest hit in rich countries. At its recent peak in the last quarter of 2007, 80% of the world’s FDI went to developed economies, but by the first quarter of this year FDI into rich countries accounted for less than two-thirds of the total. FDI to Flows to emerging economies has held up better.Africa rose to a new record of $88 billion last year, much of it going to countries rich in natural resources. Foreign investment in China and India also surged, as companies sought footholds in resilient economies. (bold emphasis added)
The falling FDI and rising stock market prices suggest that the stock market hasn't been dispensing with its traditional role as forward indicator.
Instead, what appears to be occurring is that global governments and central bankers, especially in OECD economies, have implicitly been using the stock market as an instrument for signal channeling. [see earlier discussion in Governments Will Opt For The Inflation Route]
By tweaking up prices of equity securities, the officialdom hopes to redeem the confidence lost or the "animal spirits" during last year's crisis and stoke an investment recovery.
What we have been getting instead has been rampant speculation and massive misallocation of resources or another bubble cycle.
In short the stock market has transformed from being a market signal to a policy instrument. Hence, traditional metrics under such environment won't operate effectively.
Moreover, another message from the FDI performance is that emerging markets such China, India and Africa have been diverging from OECD economies. In short, the decoupling phenomenon clearly in motion.
Of course all these comes with a cost.
For instance, as the chart above from Bloomberg's chart of the day suggests, rising stock markets from implicit policies to revive the animal spirits translates to a heavy onus on US taxpayers.
This is the result of inflationary policies, aimed at fixing short term predicaments and which benefits certain segments of the society but is paid for dearly by the productive sectors of the economy and by society in general, through the loss of purchasing power or higher prices over the long term.
As Henry Hazlitt once wrote, ``Inflation, to sum up, is the increase in the volume of money and bank credit in relation to the volume of goods. It is harmful because it depreciates the value of the monetary unit, raises everybody's cost of living, imposes what is in effect a tax on the poorest (without exemptions) at as high a rate as the tax on the richest, wipes out the value of past savings, discourages future savings, redistributes wealth and income wantonly, encourages and rewards speculation and gambling at the expense of thrift and work, undermines confidence in the justice of a free enterprise system, and corrupts public and private morals."
First is that stock markets have been vigorously rallying across the globe. This means that OECD markets have surged but has underperformed emerging markets.
From the Economist, ``STOCKMARKETS in many countries have risen steeply in recent days, buoyed by signals from central bankers in America and Britain that their economies may now be out of recession. Retail sales and industrial production data released this week appeared to support the sunnier outlook for America, helping the Dow Jones Industrial Average to a peak for the year of 9,791 on Wednesday September 16th. On the same day the FTSE 100 reached 5,140, its highest point since the collapse of Lehman Brothers a year ago. The Nikkei is also climbing mostly upwards. However, most stockmarkets have a long way to go to regain their pre-recession levels." (emphasis added)
Next is that while stock markets have traditionally functioned as a forward indicator of the economy, they appear to have been detached from economic reality.
Despite some signs of improvements, some major economic indicators such as foreign direct investments (FDI) have deteriorated in the face of rising stock markets.
According to the Economist, ``FOREIGN direct investment has fallen sharply since the start of the financial crisis, according to the latest World Investment Report from UNCTAD. The purchase of factories, buildings and other assets by foreign firms was hardest hit in rich countries. At its recent peak in the last quarter of 2007, 80% of the world’s FDI went to developed economies, but by the first quarter of this year FDI into rich countries accounted for less than two-thirds of the total. FDI to Flows to emerging economies has held up better.Africa rose to a new record of $88 billion last year, much of it going to countries rich in natural resources. Foreign investment in China and India also surged, as companies sought footholds in resilient economies. (bold emphasis added)
The falling FDI and rising stock market prices suggest that the stock market hasn't been dispensing with its traditional role as forward indicator.
Instead, what appears to be occurring is that global governments and central bankers, especially in OECD economies, have implicitly been using the stock market as an instrument for signal channeling. [see earlier discussion in Governments Will Opt For The Inflation Route]
By tweaking up prices of equity securities, the officialdom hopes to redeem the confidence lost or the "animal spirits" during last year's crisis and stoke an investment recovery.
What we have been getting instead has been rampant speculation and massive misallocation of resources or another bubble cycle.
In short the stock market has transformed from being a market signal to a policy instrument. Hence, traditional metrics under such environment won't operate effectively.
Moreover, another message from the FDI performance is that emerging markets such China, India and Africa have been diverging from OECD economies. In short, the decoupling phenomenon clearly in motion.
Of course all these comes with a cost.
For instance, as the chart above from Bloomberg's chart of the day suggests, rising stock markets from implicit policies to revive the animal spirits translates to a heavy onus on US taxpayers.This is the result of inflationary policies, aimed at fixing short term predicaments and which benefits certain segments of the society but is paid for dearly by the productive sectors of the economy and by society in general, through the loss of purchasing power or higher prices over the long term.
As Henry Hazlitt once wrote, ``Inflation, to sum up, is the increase in the volume of money and bank credit in relation to the volume of goods. It is harmful because it depreciates the value of the monetary unit, raises everybody's cost of living, imposes what is in effect a tax on the poorest (without exemptions) at as high a rate as the tax on the richest, wipes out the value of past savings, discourages future savings, redistributes wealth and income wantonly, encourages and rewards speculation and gambling at the expense of thrift and work, undermines confidence in the justice of a free enterprise system, and corrupts public and private morals."
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