The last year proved what the concerted efforts of a group of central bankers and governments can achieve. From the edge of financial meltdown the bounce back has been indeed remarkable.  Asset markets around the world put in very impressive rallies including stocks, credit markets, housing. You name it, 2009 saw it rally.
As we start 2010 we have seen a pause in this rally and a few pertinent questions are now being asked:
- Is this market rally being reflected in the performance of the broader economy?
- How much of this performance is purely down to the combined stimulus measures of low rates and money printing?
- What happens when these measures are stopped and reversed?
There are many articles being written about the possible timing of any rate rises in the US and UK, with the latter clearly expected to have to make the move first, possibly even before the end of the first half of the year. The possible effects on already fragile confidence could be calamitous.
Strong stock markets have created the illusion that all is well in the world of blue chip companies - it makes us believe that there is demand out there for the products they make, that people are comfortable enough in their employment situation to continue to make purchases, and that the economy is functioning normally. If you take a closer look at the individual company’s performance and actions, the picture becomes a little less normal. Despite the huge rally of last year, dividend payments across many companies are actually down on 2008. Surely strong performing companies would want to thank and reward their shareholders accordingly? What can be translated from this lack of dividend activity? That at grassroots level we are still some way away from functioning normally. How much of this stock market ‘valuation’ can be attributed to the fact that with base rates at zero, that extra money that is being printed by the central banks is being used to shore up troubled balance sheets, what has been created is tantamount to a risk free one way bet on the stock markets. In effect another bubble that will likely burst.
If we consider that historically low rates are soon to rise, then on top of the exiting from quantitative easing, the asset allocation trade from stocks to fixed income as the traditional ‘risk free’ asset comes into play. There is no easy fix to this problem faced by central banks, and there are numerous permutations on the exit strategy, however it is a clear concern for 2010.
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