I have learned many things in my many years. One of them is that change generally comes slowly and with some amount of struggle. Since the market R us, it is not immune to slow and laborious change. Back on June 19th the market began a transition from old thinking to new thinking and in that is a struggle.
Old thinking had many market analysts and the breathless media telling us that the major reason for the four-year global market rally was the Fed’s policy of Quantitative Easing (QE) coupled with other central banks easy money policies. As I have said ad nauseum, the idea the global market has risen primarily from loose monetary policy and that it will plummet once the money begins to fade is nonsense.
New thinking for the market focuses on a post-QE world, a world in which liquidity is drained from the global system and monetary policies designed to contain inflation and bubbles will reign.
- The central bank for the second largest economy in the world in the People’s Bank of China is now actively engaged in draining liquidity from their financial system. And the central bank for the largest economy in the world in the U.S. Federal Reserve has effectively announced that while they won’t be draining liquidity any time soon they have done enough adding of liquidity and intend on discontinuing further stimulus sooner rather than later.
In this “post-apocalyptic” market world of less liquidity, the market’s rise and fall will depend on, well, imagine, of all things, corporate earnings.
- Thus, the ability of stocks to continue higher from their arguably lofty valuation perch is likely to become increasingly challenging, as they will need to increasingly rely on earnings growth to raise stock prices going forward. And with earnings growth already grinding to a halt and corporate profit margins already at record highs, this will be a tall order for corporations to achieve.
I do agree that without QE, and the liberal policies of other central banks around the globe, the market will react more sharply to corporate earnings, but I don’t agree corporations will struggle to meet future earnings expectations of the market. As I have written time and time again, the US and global economies are heading forward and that momentum will both continue and increase as 2013 progresses and into 2014. With that, global expansion will come greater commerce, and, thus, greater profit.
Thus, the end of the QE and liberal central bank era will bring certain stumbles in the market, as those analysts who believed in the old idea will continue to push it and the breathless media will continue to sell the controversy, as it does. Eventually, however, the market will settle into its fundamental reality – valuations derive from the actual earnings of companies. Keep this in mind as we move through a summer of left over QE nonsense, political wrangling about the debt and deficit, and talk about China and Europe faltering economically.
In the meantime, consider some facts that point to potentially good things regarding man’s half-hearted battle against corruption in the financial world.
- A federal judge has made a tentative ruling that would let the U.S. government pursue its $5 billion civil lawsuit accusing Standard & Poor’s of defrauding investors by inflating credit ratings prior to the financial crisis.
- New York Stock Exchange operator NYSE Euronext is to take over running the Libor benchmark interest rates that have been at the center of a global rigging scandal.
- Silvio Berlusconi’s final appeal against a prison sentence for tax fraud will be heard in court on July 30, defense lawyers said on Tuesday.
Of the above, the first two are serious issues that do require serious remedies, and will help the market in the long run, but the third is one that points to one man’s amazing ability to multitask, an ability many say men cannot do, that only women can do this well.
Silvio Berlusconi is juggling going to prison for tax fraud, going to prison for paying for sex with a minor, and heading an Italian political party that is vying to run Italy. Now that, my friends, is multitasking.
Trade in the day; Invest in your life …
