Never underestimate the power of cheap money.
That’s money you — and the rest of the world — can borrow at extremely low interest rates.
Just look at what happened to the stock markets towards the end of 2018…and compare that to what’s been happening so far in 2019.
After a long march higher for most 2018, stocks hit a wall in October. The US Federal Reserve was on tightening path — raising interest rates and halting their bond purchases. And the Fed had signalled two more likely rate rises for 2019.
In a system that’s become utterly reliant on cheap debt, the selling began in October.
As a result the Dow Jones lost 18.77% from 3 October to 24 December.
Trump, manipulator in chief
This drew the ire of US President Donald Trump, manipulator in chief. He saw his own job security at risk. And it didn’t take long for Fed Chairman Jerome Powell to bow to Trump’s tweeted demands.
The world’s most watched central bank put further rate rises on hold. And global stock markets boomed.
The Dow has gained 20.7% since its 24 December trough. Here in Australia, the ASX 200 is up 16.0% since then.
The stock market’s meteoric rise — and the accompanying bump in his own approval ratings — wasn’t lost on Trump.
And if the Dow could gain 20% on the Fed merely keeping rates on hold, how high might it not go if the Fed dropped rates again. Say by a whole percentage point?
You can see the two tweets Trump sent out overnight Aussie time below. Along with the conversation I imagine he may have had after exceeding his character limit in the first tweet:
Darn-it! Melania, remind me to get with Jack Dorsey about upping the word count some more. This is ridiculous.
Now. Where was I? Oh, right…
It’s not often you hear Trump praising the Chinese government’s economic meddling. But then this meddling has juiced Chinese equities, which is exactly what Trump wants to see more of in the US.
China money taps hard to turn off
There’s only one problem. China is also demonstrating how once you turn on the easy money taps it’s really hard to turn them off.
This headline comes from Bloomberg, ‘China’s Stock Investors Are Still Hooked on Economic Stimulus’. The article continues:
‘China’s equity investors aren’t quite ready to see Beijing scale back its efforts to support the economy…
‘Despite some early signs of success from the government’s tax-cut program, China’s economic stabilization has so far underwhelmed equity investors, who remain hooked on the prospect of further supportive measures.’
With major central banks across the world putting rates on hold or even looking at further cuts, Chinese equity investors will likely get their wish.
And if the Fed again heeds Trump’s siren call and slashes the US cash rate from today’s 2.5% to 1.5%, the Dow could tack on another easy 20% this year. And the ASX would likely follow it to new highs.