Goldilocks?

Thursday, March 16, 2006

What do Hongkong, Jeddah, Moscow, Frankfurt, London, Vienna and New York have in common? Their share markets have all climbed to multi-year or even all-time highs!
Looking at stocks recent advances worldwide - Tokio being the exception after a strong start - the phrase of markets that love to 'climb a wall of worries' comes first to my mind. The global view offers an array of stock exchanges where investors drive share prices to levels never seen before.
Markets were able to feed on positive news recently.
Wall Street's surge to 5-year highs comes on the back of a good earnings season, last week's solid employment report and today's tame inflation figures. Treasury International Capital (TIC) data showed unabated foreigners appetite for US securities and the economic outlook was described as steady in the Fed's Beige Book.
In Europe recent indicators sparked glimmers of hope that the worst may be over, pushing markets to multi-year highs.
Unemployment in the EU fell from 8.9% to 8.3% year-on-year. Inflation slowed to 2.3% in February, industrial orders were up 2.5%, construction saw a light expansion and so did retail sales in Europe.
Britain is different.
Unemployment, currently at 5%, is on the rise while steady incomes led to a slowdown in retail sales growth.
Oh, and before I forget it: China, India and Russia are powering ahead at growth rates unheard of lately in the so called "industrialized world."
Talking of China please take note that the giant's inflation rate has come down to an annual rate of 0.9% in February. House prices were up 5%.
So are we looking at a Goldilocks economy where everything is just about right?
Hardly.
Global imbalances have only become worse recently
. Both Europe and the USA are running record current account deficits although Europe's deficit of 88 (2004: 18) billion Euros in 2005 pales in comparison to the shocking deficit the US has run up. In 2005 the deficit rose a staggering 20% to $805 billion or 6.4% (5.7%) of US GDP.
These deficits are financed the seemingly painless way: By printing ever more money.
US money supply M3 draws an ever steeper growth curve and has almost caught up with runaway M3 growth in the Eurozone. Latest figures show an annual rate of 8.3% for the Eurozone and 8.2% for the USA.
As long as there is so much liquidity added day after day stock markets will go up.
But the interest rate outlook may finally put brakes on the latest advances. In both Europe and the USA leading interest rates are set to rise more. Fed members have recently been as hawkish in their speeches as in their latest statements. Sky-high advances in raw material and energy prices are likely to ooze through into the Fed's beloved core inflation rate.
The same can be expected for the Euro area. The ECB does not get tired to warn of more inflationary dangers from persistently high oil prices and money supply growth.
Light crude trades close to$65 per barrel at this moment. Any spike in the wake of geopolitical developments will force the ECB to accelerate its rhythm of rate hikes, endangering fragile economic growth in the EU.
I am not going to rest my head on a few positive indicators, seeing that none of the structural problems will go away by itself as there are no attempts to balance the budgets on either side of the Atlantic. And one thing is guaranteed: It has never worked when trying to print a way out of problems.

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