The presidential election slogan proposed by Bill Clinton 20 years ago was "It’s all about the economy, stupid." The election is swayed by the economy. An extraordinary event took place in the U.S. presidential election when Republican presidential tailender Rick Santorum ranked first in the approval rating with 36 percent, 8 percentage points ahead of the front runner, Mitt Romney.
If the economy becomes better, which of the two - the ruling party or the opposition party - will be advantageous What is the advice that former President Clinton hopes to give Obama
Thanks to the FRB's supply of massive amounts of paper dollars, the global financial market was buoyed up. As stock prices went up, investors have been engaging in massive buying under the prediction that soaring stock prices is a sign of the recovery for the U.S. economy. In Korea, the KOSPI approached a record high, boosted by foreign investors who bought some KRW 10 trillion worth of stocks in just two months.
However, the U.S. economic recovery, which came six months before the presidential election after passing through the 3.5-year long business slump, seems to be indifferent.
“Bullish stock market” - What if it makes Obama and Bernanke angry
The effects of the massive amounts of money supply since the financial crisis were almost exhausted.
If the U.S. economy worsens further, Obama and Bernanke may increase liquidity, boosting stock prices.
Now the U.S. is preparing for the Quantitative Easing (QE) 3 again. There is a reason that the U.S. continuously made steroid injections to boost the economy. Although the U.S. supplies the largest amounts of money, there are no clear signs of economic recovery, improvement of employment situation or a rise in real estate prices. The reason is the broken financial system.
The money does not circulate in the U.S. and the zero interest rate destroyed the financial system; lessening the value of dollar. It has brought about a distorted distribution of resources and moral hazard in use of resources. The speed of currency circulation fell to the lowest level since 1959.
The reason causing this is that the money supplied was unable to reach the real estate market in order to boost the real economy, but flowed into Wall Street and the emerging markets.
“Kiss of death”- What happens if we fail to control the ample liquidity
Traditionally, the role of the central bank is price stabilization. The central bank should check the government which tends to boost the economy and stimulate commodity prices. However, the government is now in a bind with the financial crisis. Affected by this circumstance, the central bank moves politically. Many foreign Central banks are turning swiftly to boost the economy, instead of curving high inflation.
Many central banks, including FRB of the U.S. and ECB of Japan, rushed to supply more liquidity competitively. Since the last quarter of 2011 when the European financial crisis started to accelerate, 16 central banks supplied enormous amounts of money to lower interest rates and ease liquidity.
The attempt to boost the economy through expansion of money supply is called the "kiss of death." If all countries supply more money to lower the currency value, it will bring about the currency war, which will lead to the financial war eventually.
“Bullish stock market supported by the central bank”- How long will it last
The biggest supporters of the stock market are central banks presently. The money floated by central banks of eight major countries amounts to nearly 30 percent of the total market capitalization.
The U.S. bourse is the barometer of the global stock market. Most U.S. experts anticipate that the peak of the current stock market rally will reach between 14,000 and 15,000 in the Dow index, up 8-16 percent from the present level of 13,000.
Liquidity feast, but what should I watch carefully
-1) U.S.-the truth of economic recovery is consumers' credit
Representative indicators of the U.S. economy are cars and houses. Employment figure is the fundamental of the U.S. A signal of economic recovery was seen slightly in automobiles and houses. But, the signal stemmed from the fact that the FRB's zero interest rate policy (ZIRP) lowered market interest rates and gave U.S. citizens a "big ticket" to buy cars and houses.
The improved employment indicator of the U.S. is a favorable factor for the stock market. However, the employment situation did not improve considering many people make zero efforts to land a job or receive state subsidy without working. At present, people who collect "food stamps" cannot make a living without handouts given from the government reach one-sixth of the total population.
Moreover, U.S. households do not increase their savings; rather they reduce savings to increase consumption. As a result, there is a possibility that the present U.S. economy, which shows signs of recovery, will peak out before the presidential election.
The U.S., which has been dependent on real estate mortgage for consumption, is making an economic rebound by using credit loans. The country, which maintains its economy with debts, cannot last long.
-2) Europe, curtailment-pursuing economy following bailout loans
The words suitable for the stock market rally this time appeared amid the European crisis were "the worst time of the European economy was the best chance for investment." The possibility that European countries will face a series of state bankruptcies killed the market, but the active support by the U.S., China and Northern Europe to Southern Europe, revived the stock market.
However, it is not an end. "Fierce retrenchment" is waiting for debt redemption after the bailout loans. Curtailment-pursuing economy will come after tiding over the crisis. In this case, unemployment situation will worsen and the economy will face more difficulties on a short-term basis owing to sell-offs of assets. Accordingly, we need to carefully watch the direction of the global liquidity after solving the problem for the coming maturity of debts in the first quarter in Europe.
-3) Gold, oil, copper
Now, seeing the stock market as a thermometer of the economy has no meaning. It is just one of the portfolios for investment assets, which were created by a flood of money.
Since Dec. 7 last year, Europe has held a liquidity feast. The liquidity party started in keeping with the U.S. currency swap against Europe. If we compare prices of stocks with those of gold, oil and copper after the liquidity became affluent, we can see the preference of assets favored by Europe-sparked liquidity.
In terms of price increase rate since December last year, copper price topped the list, followed by KOSPI, S&P index, oil and gold.
Where will the ample liquidity, which ate enough in the commodity market, go The answer is oil and gold. Ironically, central banks that have to keep the currency value started to buy gold from last year. The Bank of Korea also bought gold last year. They provided a tip with the means to curb the fall of the currency value is "gold."
-4) Sentiment indicators of market
Now is an era of the flood of money. But, it will certainly accompany serious pain. Central banks abandoned their original role for price stabilization and implemented the currency policy in a political theory, disregarding the inflation effect which will appear 9-12 months later.
The distorted distribution of resources based on the zero interest rate destructs capitalism. As we experienced in the financial crisis, the next stage of the relief loans to Europe is restructuring. In this case, the European money, which flowed into emerging market, will escape from it.
Although the stock market runs toward a record high, but enterprises' profitability has been on a declining trend, influenced by sluggish demands and a rise in prices of raw materials. The widening gap between rising stock prices and falling enterprises' business results leads to somebody's loss, namely investors.
