The TSX hit another record high yesterday. Canada's benchmark stock index hit 15,534 around 2:00 pm on Wednesday. That was 57 points higher than the previous record, set in late July. The market closed a bit lower. But the point is that stock markets are doing well. In the U.S. both shares and the 10-year Treasury bond are up 8 percent this year.
So all is good for investors in securities.
But some wonder how these valuations can hold up considering the plethora of bad news
out there. A smattering of negative news bits: German Q2 GDP fell 0.2% , growth in France has flatlined, overall EU growth was non-existent. ISIS continues to take over the middle east (with funding from Qatar according to a German minister). CAT has now posted a new record of 20 consecutive months of retail sales declines. The average price for all types of ground beef per pound hit its all-time high -- $3.884 per pound -- in the United States in July. The Commerce Department reported yesterday that retail sales stayed flat in July as stagnant wage growth constrain consumers. Without bad weather to blame (as was so common this past spring) it now looks as if retailers are just experiecning flat sales levels, even when the sun is out.
Nevertheless, markets continue to rise. How can this be?
Welcome to the "bad news is good news" market. The phrase has been floating around markets of late. The idea goes like this: With the world's central banks committed to do 'whatever it takes' to prevent deflation and stimulate credit growth, every bit of negative data is taken by traders that central banks will dose markets with fresh monetary stimulus. That is, the more bad news, the greater the help from central banks to help life asset prices. The more likely central banks to act, the more stocks rise. Which is the consequence of this weird era in which which central banks, not market fundamentals, have come to play the central role in markets. Since the Great Recession of 2008, central banks have beeen driving markets with unprecedented stimulus measures. The result is now a mixed-up, muddled-up world in which bad news is good, good news is bad.
The reverse side of this current unique period of backwards cause-and-effect is worrying: Any sharp acceleration of the world economy--say a big boost in employmenet--would be a sign that central banks will ease their support of marets, traders will begin selling off, the long-term equity bull market will be toast. Which seems odd, but is one of the thoughts du jour
of this era.
"It's Bizzare," said well-known stock commentator Robert Shiller on CNBC yesterday. “When the titanic was sinking anyone would pay anything for anything that floats. That might be the situation we're in now…the whole thing might correct down, both stocks and bonds."
There are some who believe that the ultra-low rates are a sign that there are deep structural forces at play in the global economy that are limiting growth. Take your pick of reasons, peak oil, overpopulation, climate change. Whatever the case, there is something working to sap the growth of the global economy. Rates this low in the late 1990s would have sent the global economy into dangerous levels of growth. But today, nothing, interest rates are at historical lows, have been for years. Still the global economy has failed to return to the growth rates of past eras. This is weird. The suggestion is that something way down in the dank engine room of the global economy is no longer working as used to be the case. Or so goes the suggestion from Shiller.