Cheap money is fuelling the stock market’s dramatic bounce

Allister Heath
FOR the first time ever, the Dow Jones has closed above 15,000, in a major boost for investors everywhere. Remarkably, the index was at 14,000 just 66 days ago and is now up by 129 per cent since the 2009 trough, in a striking demonstration of the speed and scale of the bounce-back. With the FTSE 100 also doing well, it is tempting to see all of this as a sure sign that the global recovery is intensifying. Tempting – but only partly true.

There is no doubt that the economies of many countries, including America’s, are now in a drastically stronger position than they were five years ago, even though the recovery has been strikingly weak and is now stalling. Even German industrial production figures were surprisingly good yesterday, following a bad run. Equally, there is as yet no real bubble in US stocks, which appear roughly fairly valued if expected earnings materialise, though are no longer cheap. US equities are now six per cent higher than they were before the markets popped. Companies such as Apple are buying back stock and returning cash in massive amounts, bolstering the market.

But one of the reasons for today’s surge was the surprise rate cut from Australia, and this reminds us of the recovery’s dangerously flimsy underpinnings. Ultra-loose and interventionist monetary policy globally is one of the main causes of this resurgence. Pretending that it isn’t, and that economies – even those like America’s which have liquidated many past malinvestments – could immediately and easily readjust to neutral interest rates and zero intervention is a dangerous delusion.

Much of the central-bank induced madness that led to the last two bubbles is reaching ever more dangerous proportions, not least the Fed’s hubristic determination to prop up markets and invoke Bernanke puts.

The Eurozone remains in a precarious position. Japan is once again desperately seeking to reflate. The UK is subsidising credit. Canada’s housing market is in a bubble. If anything, the data points to a global growth slowdown – and astonishingly, in our topsy-turvy world, the cheaper money this implies is actually propping up asset prices. Bad economic news has become good for asset prices, a phenomenon that helps explain many of the aberrations we notice everywhere, including the dramatic shrinkage of the interest rate gap between German and Spanish bonds.

Lawrence McDonald, author of a Colossal Failure of Common Sense, reports that 44 per cent of US firms are reporting lower than expected sales, with top line growth dragged down by the energy sector and profits coming from cost-cutting. Covenant-lite bond issuance – debt whose terms are extremely favourable to companies, and which was disastrously commonplace in the mid 2000s – has reached an annualised $90bn this year (extrapolating from the first five months), against $63bn last year, $37bn the year before, $9bn in 2010 and nothing in 2009.

Of course, the US, UK and many other economies are well past the worst. But that doesn’t explain all of the rally. Cheap money is also doing the trick, and that is merely storing up problems for the future.

EVERY so often, a business leader transforms a company and delivers massive shareholder value. One such figure is Paul Walsh, Diageo’s CEO, who has announced his retirement from the firm, now the eighth largest on the FTSE 100 by market cap. He is one of the leading business figures of his generation and deserves to be celebrated as such.
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