If you read the ‘start the week’ data on the Bloomberg business news website today, you might conclude that nothing much was going on – everything is calm and nobody is worried about anything.
But if you happened to have looked at the same site yesterday, being a Sunday, you would have seen a more thoughtful set of bullet points. They highlighted the fact that Germany is going into recession, politicians in Europe think the UK is now just playing a blame game and does not want a Brexit deal, there are potential difficulties coming up with the US/China trade talks and that maybe the US economy has now joined the global slowdown.
The last possibility can hardly be a surprise, given that anyone who knows anything about economics from a GCSE student upwards would have predicted that as a likely outcome of US policy on global trade.
Some readers may have thought it odd that US stock markets seemed to react positively to weaker US employment growth, one of the data points underlying the suspicion that the US economy is now braking.
That is because the possibility of a slowdown should, in theory, lead to lower interest rates in the US and the basis of equity share valuations is, at a fundamental level, connected with interest rates, Broadly speaking, lower interest rate expectations are good for equities because they are good for bonds.
This however is a mechanical relationship, so may not always correctly predict the prospects for equities in the medium term. If there is too much inflation at the same time as a slowing or even shrinking economy, suggesting that horror or horrors – stagflation, then the prospects for shares are really rather poor. Furthermore, the use of monetary loosening to boost asset prices is rather taken for granted, It is questionable as to what outcomes might follow if interest rates can only go down further by becoming negative.
So we should not join in the markets excitement about lower interest rates and assume that, as I have suggested before, central banks, will always be able to bail out ill thought-out political policies, or fantasy financial constructions in the corporate banking sector.
One might think of quantative easing as a bit like paracetemol. It lowers the pain if used judiciously, but take too much and you will get some fairly horrible major organ damage.
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