Thursday, November 6, 2014

Why American Equities Are Rising

In addition to manipulation by the government-financial complex other forces are converging to further distort and disconnect Wall Street from the American economy. Why American equities continue to rise is very important, more is at force here than the usual causes which might include a pre-election and post-election rally. The market has been all a twitter as we continue in a "greed and stupidity loop" that can best be explained as follows, stocks are rising so why get out, not getting out is causing the stocks to rise. We are experiencing a double down and let it ride mentality that has been ratcheted higher by media hype, but more is behind the stock market move.

Greed is running rampant at a time when low interest rates continue to force savers to move to more risky investments or see their wealth erode through inflation. Just as important it must be noted that as the dollar gains strength cross border money flows have become a massive factor. U.S. assets have already become  the biggest benefactor of the Japanese Government Investment Pension Fund’s (GPIF) decision to more than double its target allocation of foreign stocks to 25%. According to analysts the changes to the $1.1 trillion pension fund coinciding with the Bank of Japan’s shocking decision to ramp up stimulus on Friday is a big reason for why global equity markets are soaring.

“The shift for international equities going to 25% of pension fund holdings is fairly big news,” said Tobias Levkovich, chief equities strategist at Citigroup. “It establishes a new incremental buyer of shares and the U.S. should be a significant beneficiary,” he said. The overall contribution to non-Japanese stocks could approach $60 billion of new purchases, half of which could go to the U.S. by the end of 2015, Levkovich said as he noted that foreign investors typically buy large cap stocks which have greater index impact. While these cross border flows have been good for the market I caution it does not fundamentally change the economy.

Most analysts agree that money from countries with weakening currencies is flowing out of the troubled areas and the U.S. is receiving most of the benefit. The Japanese as well as many Chinese and Europeans know with so much money floating around and few safe harbors America is becoming the most comfortable option for temporary investing their money. Currently, the world is watching Japan closely because it’s such a large economy and its currency appears to be in a free-fall. If the global markets start leaning on Japan, something that may happen any moment now because of its behemoth debt levels, the entire country could start going up in smoke.

Japan's leader Abe took office promising he had a fix for the economy, but as signs appear that the situation is only getting worse. Abe has given signs of seeking to take the blame for his failures out on China and while some nationalist in the population may follow him it doesn’t look like there’s enough trust left for him to move forward. It is hard to predict who will follow as the next leader, but it’s still a highly volatile situation that Japan finds itself in with huge potential downside effects for the whole world. The system is signaling that it is unstable and this means contagion could quickly take root bringing about an abrupt fall in stocks.

    Footnote; Your comments are welcome and encouraged. If you have time please check out the archives for other post that may be of interest. Below are two post I recently wrote, one deals with how the Fed has voiced concern over the impact of a stronger dollar, and the other about not underestimating the importance of preserving your capital because it could get ugly very fast.

1 comment:

  1. I see no reason for equities to crash. Earnings continue nicely positive. World GDP growth is accelerating, and has been for 3-4 years. All the economic feed-stocks are now relatively cheap (energy, capital, commodities). Global debt is high, but not anywhere near historically high. I'm betting on continued global GDP acceleration for at least 3-4 years, leading to inflation, leading to higher interest rates, leading to pay down of debt. In the long term (2030-2050), I see a number of fundamental factors limiting growth, including energy, climate, resources, population, etc...