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Time for a 'melt-up': The coming global boom

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Get ready for a "melt-up."

Back in mid-October, as stock markets around the world plunged faster than at any time since 2011, many investors and economists feared a meltdown. But with the U.S. economy steadily expanding, monetary and fiscal policies becoming more stimulative in other parts of the world and the autumn season for financial crises now over, a melt-up seems far more likely.

There are many fundamental reasons for believing that stock markets may have embarked on a long-term bull market comparable to those in the 1950s and 1960s, or the 1980s and 1990s, and that this process is nearer its beginning than its end. Such arguments have been discussed repeatedly in this column over the past 18 months - ever since the Standard & Poor's 500, the world's most important stock-market index, broke out of a 13-year trading range and started scaling new highs in March 2013. Wall Street has been setting records ever since.

These are the four most important arguments for a structural bull market:

First and foremost, the worst financial and economic crisis in living memory has ended, and most parts of the world economy are enjoying decent, if unspectacular, growth. Second, economic and financial policies around the world, though far from perfect, are highly predictable and therefore unlikely to cause further market disruptions. Third, technology is continually advancing and innovation is creating new products, services and processes that stimulate both investment and consumer demand. Finally, inflation is almost nonexistent, at least in the advanced economies, meaning interest rates are guaranteed to stay low for a very long time.

Even in such benign conditions, minor corrections and panics are bound to happen. Financial markets always move in boom-bust cycles, as greed alternates with fear. We saw this in early October, when Wall Street fell by 10 percent in three weeks and equity prices in Europe plunged by almost 20 percent in relation to the U.S. dollar. Such setbacks, however, actually reinforce the uptrend if the fears that triggered them turn out to be illusory - or less daunting than they first appeared. That is exactly what has happened.

There were two obvious catalysts for last month's stock-market retreat: a sudden drop in oil prices and a run of dismal economic figures from Europe and Japan. The first problem was never likely to prove more than a temporary hiccup because falling oil prices are, on balance, beneficial to consumption and corporate profits - even if they hurt energy-producing companies and countries.

By contrast, the second problem - slumping economies in Europe and Japan - threatened investors with a genuine nightmare. No matter how well the U.S. economy might perform, global businesses could not shrug off a possible recession in Europe and Japan, especially if the governments or central banks in these countries refused to follow the U.S. model of fiscal and monetary stimulus to revive growth.

Luckily, the policy paralysis in Europe and Japan has now been broken and that, in turn, means that the risk of these vital regions falling back into recession is smaller than a month ago.

The most impressive sign of new policy dynamism came from Japan, with its dramatic Oct. 31 announcement that the Bank of Japan would substantially increase its already enormous monetary expansion, while the $1.2-trillion Government Pension and Investment Fund would more than double its allocation to equities and foreign bonds.

These stimulus measures have been supplemented by reports that Japanese Prime Minister Shinzo Abe might delay a tax increase planned for next October and could even call an early general election to give himself more freedom to pursue additional reforms. Abe seems to have reverted to full-scale stimulus policies after his misguided effort at fiscal tightening in April.

As a result, the favorable economic conditions of 2013 are likely to be restored in Japan next year. Investor pessimism caused by April's tax hike has vanished - and rightly so. When the facts change, people should change their minds.

An equally surprising, though less decisive, shift toward active policy stimulus is taking place in Europe, revealed by two recent events: last Thursday's European Central Bank meeting and the previous week's announcement that the French and Italian governments would run bigger budget deficits than the European Commission had previously demanded under euro zone fiscal rules.

The European Commission, by accepting the two countries' budget plans and ignoring German demands for tougher austerity, signalled the end of the fiscal tightening that has been a major obstacle to European economic recovery. The European Central Bank's announcement was even more significant. European Central Bank President Mario Draghi explicitly committed himself for the first time to a 1-trillion euro expansion of the bank's balance sheet and promised to take whatever measures were necessary to achieve this. This statement effectively meant that the central bank had finally agreed to implement large-scale quantitative easing - albeit employing different techniques from those used in the United States, Japan and Britain.

The fact that Europe and Japan are finally ready to follow the U.S. fiscal road map will not suddenly remove all the obstacles to growth in these economies. But it will make structural reforms easier and more effective. The prospects for a sustainable global expansion are therefore much brighter than expected a month ago.

This improvement in the global economic outlook is more than enough to justify the powerful rebound in stock markets since mid-October.

Even if economic conditions continue improving, equity prices are bound to fall sharply at some point, inflicting painful losses on investors. This is what happened in 1987, roughly five years into the last structural bull market. Boom-bust cycles are inevitable because improving economic conditions encourage speculative excesses, which are then blown away as greed gives way to fear.

But the bust cannot come before the boom - and global economic conditions suggest that a full-scale stock-market boom may be just starting.

© (c) Copyright Thomson Reuters 2014.

©2024 GPlusMedia Inc.

11 Comments
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monetary and fiscal policies becoming more stimulative in other parts of the world and the autumn season for financial crises now over, a melt-up seems far more likely.

For some reason, I suspect this article, particularly this bit about "monetary and fiscal policies becoming more stimulative," was written just before Japan released its dismal GDP numbers yesterday.

2 ( +3 / -1 )

Wishful thinking from the mainstream media.

The world's going down, and it's going down hard.

2 ( +3 / -1 )

He may be right because this is what the ruling elite want. however there is a chance that the weight of carrying the world on hot air and cheap and predictable money will prove too much.

1 ( +1 / -0 )

Apple is now apparently worth more than the entire Russian stock market. That by itself shows how kooky things are.

Still, the sandbox is a lot bigger today than it was, and that size will, one would hope. provide a bit more stability.

2 ( +2 / -0 )

Hogwash.

The current trend monetary easing and stimulus spending is like like a drop of clove oil on a toothache, it eases the pain, but the effect is temporary, and does nothing to cure the cavity.

Current economic policies are all short-sighted schemes, designed to profit policy makers, at the expense of the rest of us.

Here is how it works. First, you lower the interest rates to nearly zero, which allows your country to borrow at a lower rate. You issue bonds, and then buy them back yourself, which gives you more of the taxpayer's money to spend. Then you dilute the money supply by adding to it, in order to further increase the money available to spend, and also create phony inflation, which helps relieve the some of the weight of your debt servicing costs.

Once your country has borrowed or printed enough money, it then spends the money on projects which generate jobs for the politically connected, and kickbacks for the politicians who write the checks. The extra money which is pumped out by the central banks is loaned out out to companies who then use the funds to buy back their own stock, thus inflating it's value, and creating the bull market which we currently see.

Over the course of only a couple years, we have seen the Nikkei double in value, while the Dow, Nasdaq, and S&P 500 grow tremendously. But where is the underlying growth? We have seen growth of less than 2% in most developed countries, and negative growth in Japan, so why have the stock markets risen so dramatically? Because of what I said in the previous paragraph.

Perhaps you know that executive pay is tied to stock performance, and not sales. As such, executives have found a way to bump up their salaries without having to actually make their companies more successful. This is wrong, but the government is doing the exact same thing, borrowing money to create phony growth by which it profits directly. The only trouble with this practice is that it's effect is temporary.

The world's third largest economy is in recession, despite the fact that it's stock market is at the highest level in recent memory. There has been no real economic reform, the population continues to decrease sharply, most companies are still reporting an annual loss. The current stock market prices defy logic, but they can't defy it for long.

1 ( +4 / -3 )

Sangatsu, the population is decreasing at a rate of 0.2%. You call that decreasing sharply?

0 ( +3 / -3 )

Sangatsu, the population is decreasing at a rate of 0.2%. You call that decreasing sharply?

Really? The population is predicted to fall from 127 million to 87 million by 2050. I helped with the making of the official report. That is a drop of nearly one-third, correct? The population decreased by 244,000 last year, but as the average age in Japan increases, and fewer people are being born, the rate of decline will steepen quickly. The situation is less a problem with the number of people dying as the lack of people being born. Abe said he has plans to stabilize the population at 100 million, but if he is as good at maintaining population numbers as he is at meeting his goals for inflation and GDP growth, we aren't likely to see the decline stopped, or even slowed down.

-1 ( +2 / -3 )

Did we not all just see an article yesterday that Japan has entered into recession once again or was that an alternate universe?

As for the optimism about the US economy, it will not last. Make money now while you can, but there will be another US recession before the end of the decade, perhaps as soon as next year. I sincerely hope not that soon.

As for the European economy, there will also be another recession approximately the same time, but it may not be as bad as the US. They now have a much tighter reign on their banks and financial industry although there can always be surprises.

The US economy is still 70% retail driven and the average US worker is still broke and struggling. The US middle class is still shrinking and the recovery did not provide enough good paying jobs. Do not be fooled by gross numbers.

1 ( +1 / -0 )

In the end, let's hope governments around the world MUST realize that too many government regulations and too complicated income tax systems end up causing way more problems than they solve. This is now the opportunity for national governments to simplify various business regulations and especially massively overhaul their tax laws so both are far less a burden on running a business.

In the USA, just the Federal income tax code costs American residents and businesses US$1 TRILLION (just over 117 trillion Japanese yen) per year in compliance and economic opportunity costs right now according to the non-partisan Tax Foundation, and going up every year. This is economic insanity, and a drastic simplification of the tax code could free up hundreds of billions of US dollars per year now spent dealing with the tax code for more way more productive purposes that can really create real economic growth. This is why I'd like to see PM Shinzo Abe do something extremely daring like a drastic overhaul of income taxes in Japan to something that permanently stimulates the Japanese economy.

0 ( +0 / -0 )

This article is just way out of date! This is just an opinion piece, not news.........nor even a decent opinion

0 ( +0 / -0 )

As a result, the favorable economic conditions of 2013 are likely to be restored in Japan next year. Investor pessimism caused by April’s tax hike has vanished - and rightly so. When the facts change, people should change their minds.

But then Japan released it's third-quarter economic figures, and instead of the 2.4% growth they had predicted, they ended up with a 1.6% drop. This means that the favorable economic conditions of 2013 are likley not to be seen again. Invester pessimism never vanished, investers have profited as they can from the situation, like a doctor who collects fees for treating a terminally-ill patient.

-3 ( +0 / -3 )

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