Market highs reveal global uncertainty

Market highs reveal global uncertainty

Investors seem deeply skeptical of this global all-asset rally even as they keep pumping more money into it.

In normal times, money shifts between riskier investments and safe havens. When investors feel bold, they like stocks, junk bonds, derivatives, and emerging-market currencies because of the higher returns they promise. They prefer them when they feel the risk is reasonable. 

When the risk seems too high, investors tend to get out of those products and into lower yield products which are generally considered less risky, like gold, government bonds, the Swiss Franc, and the Japanese Yen

But these are not normal times, it seems. With major central banks offering near-zero and even below zero interest rates—essentially offering free money or even better, paying large investors to take money and invest it—investors are doing just that, taking the money and putting it in high-yield, low-yield, and might-yield assets of all kinds.

It's not quite like the tech bubble of 2000, when venture capitalists put down millions to back anything with a word or even a made-up word followed by "dot com." But it is similar: people with money to spend and no clear idea where to put it. That's what you get when artificially created liquidity meets companies and countries struggling to find new ways to create real value. 

The US job market, which is on a 75-month streak of net job creation, the longest in history, is still considered weak, mainly because of anemic wage growth. Global economic growth is in trouble as well. The World Bank recently cut its forecasts for global growth. 

One reason for the World Bank's dimmed view is that usually when one region is in trouble, like Europe during the Greek crisis, another is in something of a boom, like China's real estate market or the US stock market

And because the central banks were pumping free money to try and get investors to create jobs and drive up incomes and consumer spending, there was plenty of cash to push into whatever was hot. The downside to this has been that too many investors have used the cash to simply drive up their own fortunes, not create new businesses or jobs. 

Similarly, governments, particularly in the US from the federal to the local, have failed to use low-interest credit to repair and build infrastructure, which would create millions of jobs. Instead, governments have relied on austerity programs, believing that if they shrink their budgets, the private sector will experience a wave of confidence and start investing. That has never happened and is not happening. 

Even in China, where the government offered free money to companies to build such crazy things as ghost cities—cities built to house companies and families who never planned to move there, the central bank is struggling to roll over the debts those companies owe. Eventually, a lot of bills are going to come due. 

George Soros is said to have returned to actively trading his family office's fund. Sources told Bloomberg that he has sold stocks and bought gold and expects serious trouble for China as its debt problem worsens. In April, he said that most of the money Chinese banks are giving out now is just to keep bad debts and losing investments afloat. It's good money after bad. 

So George Soros is pessimistic in the long term and he's actively trading stocks and gold in the short term. Sounds about like the rest of the world, which is deeply skeptical of this global all-asset rally even as it keeps pumping more money into it. 

This summer, as the UK and Europe tremble over the possibility of a Brexit vote, and China frets over a debt-fueled economy that looks too much like the US in 2007-8, and the US looks at an election in which one of the major parties is increasingly fractured and incoherent, only a few things are certain. 

First, investors who can still get cheap money will continue to fling it at anything, safe or risky, that they can find (except infrastructure and higher wages, unfortunately). It's a kind of diversification run amok. 

Second, inequality is going to be more openly talked about as the real problem. Debt is a problem for sure, but the central banks will eventually see the limits of what monetary policy can do in the absence of real investment in production and people. 

And third, there will be plenty of short-term trading opportunities along the way. The markets are going to have ups and downs as we go through this time of worldwide transition and uncertainty. 

Photo: George Soros by Heinrich-Böll-Stiftung, Flickr (CC 2.0)

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