It can hardly be a surprise. Across the world, stock markets are booming (Dow futures indicate it will open today around the 14,170 mark, a new record). Bond prices are also strong in developed markets despite those same sovereigns usually being mired in a debt crisis. At the same, no major currency has collapsed, thanks to the cancellation effect of simultaneous Western devaluation, and commodities (WTI crude is perhaps the exception), have looked fairly stable, even though the bull run has stopped. In short, if you have any asset base at all, you had to be quite special to have lost money in the last year.
Strong stocks and strong bonds are an unusual mix. Theoretically and historically, money has washed from one to the other causing rises and falls along the way. What is unusual about the present climate is that so much money has been created by central banks that there is sufficient available to create a bubble in, well, everything.
This has a lot to do with how QE operates [ed. quantitative easing]. Unlike straight money printing, it is designed to transfer money to banks, not to the consumer or to the government. The banks swap their existing government bonds for newly printed money. In theory, the banks now lend this cash on the high street to consumers and businesses. In reality, that has been a problem. Burnt by the financial crisis, banks have imposed tougher lending criteria at a time when creditworthiness is impaired. As such, they cannot lend. Instead the money ends up in the trading account. It gets spent on financial instruments in proportion to the greed (equities) or fear (bonds) of the institution in question. The main reason that QE has not been catastrophically inflationary is that so little of it has filtered down to the high street. For the most part, it has simply pushed up values across the board in the financial markets.
by Thomas Pascoe, The Telegraph | Read more:
Image: uncredited