All in all the threat of a US government shutdown turned out to be a fizzer for the Australian market. Australian stocks closed yesterday down just 12 points.
And as we read news from around the markets yesterday afternoon, even the US markets gave the shutdown a big yawn.
As reported by Bloomberg News:
‘Standard & Poor’s 500 Index futures added 0.3 percent as the shutdown became official.‘
By the close in New York this morning, US stocks were up 0.8% on the S&P 500.
So much for the great panic many had feared leading up to the shutdown. As we noted on our Google+ page yesterday, the biggest fear of a shutdown is from the politicians and bureaucrats who worry the public will realise that things carry on just fine when the government isn’t meddling.
Of course, in our view the US debt ceiling and government shutdown talk is just a sideshow. The real story is low interest rates. But we must admit we forgot all about the Reserve Bank of Australia’s (RBA) interest rate meeting yesterday.
Turns out we didn’t miss much, it’s business as usual…
The key paragraph in the RBA’s statement was this one:
‘The easing in monetary policy since late 2011 has supported interest-sensitive spending and asset values. The full effects of these decisions are still coming through, and will be for a while yet. The pace of borrowing has remained relatively subdued to date, though recently there have been signs of increased demand for finance by households. There is also continuing evidence of a shift in savers’ behaviour in response to declining returns on low-risk assets.‘
Be in no doubt that the Reserve Bank of Australia seeks to manipulate the stock market and asset prices just as much as any other central bank.
That single paragraph from the RBA statement is proof of that.
It helps to confirm our view that despite the recent run-up in stock prices, it’s still a great time to buy stocks…
Blowing Bubbles Until They Blow Up in Your Face
But it’s not just stock prices getting a boost.
The property bulls have begun shaking off the cobwebs. They insist once again that Aussie housing isn’t in a price bubble…and if we read between the lines they suggest it never will be in a price bubble. (Cue the usual excuses about a housing shortage.)
The reality is different. Of course housing is in a price bubble. In the same way that stock prices are forming a price bubble too.
However, just because prices are in bubble territory doesn’t mean the bubble can’t grow bigger. If you’ve ever blown up a balloon you’ll know it’ll always expand that little bit more than you expect…
…And then it blows up in your face.
That’s what’s happening with asset prices right now, and it’s all with the blessing of the RBA.
To be honest, everything is playing out pretty much as we expected. Central banks continue to manipulate the markets and push them gradually higher.
The ultimate aim for the central bankers is to control asset prices in much the same way they control inflation. The central banks believe they’ve got inflation manipulation down to an art form – managing a gradual increase at around 2-4% per year.
Take the following chart. It’s the US Personal Consumption Expenditures index, one of the US Federal Reserve’s inflation measures:
Source: Federal Reserve Bank of St Louis
Central bankers would like asset price charts to look just like this.
Whether it’s house prices or stock prices, if they can engineer a gradual and relatively non-volatile price rise it will have obvious knock-on consequences for the economy.
The biggest benefit would be for the banks, who could forever increase their loan book. They’d never again have to worry about falling asset prices and loan defaults.
Now, perhaps you’re thinking, ‘What’s wrong with that?’
They Have the Power and They Will Use it
Well, the biggest problem is that it takes all risk and reward out of the market.
It’s merely an extension of the illusion of wealth caused by continuous inflation. At first glance people think they’re wealthier because wages are higher, but much of the wages growth is purely down to inflation rather than genuine growth.
If central banks manage to achieve the same goal with investment markets you’d get the same illusion of growth without any actual growth.
Currently, it’s still possible to beat the market and also beat inflation. You just have to buy low and sell high when the opportunities arise.
The problem comes if the central banks achieve their goal of making asset prices grow in the same way they’ve allowed inflation to grow. Under that scenario you’re always buying high and selling high – in nominal terms anyway. Or put another way, it would turn stock prices into nothing more than a cash-equivalent investment…and that won’t make anyone rich.
Quite when the central bankers will crack the code and find the secret to manipulating the markets is anyone’s guess. Hopefully they’ll never do it. But whatever happens, you can expect them to push interest rates as low as possible.
The Reserve Bank of Australia kept rates on hold yesterday, but don’t expect that to be the end of the interest rate cutting cycle. The RBA knows it still has plenty of room up its sleeve to cut rates and push stocks (and house prices) higher.
Be under no illusion: the RBA has this power and it’s guaranteed to use it. We’re still on track for ASX target 7,000 by 2015.
Cheers,
Kris+
Special Report: UNAVOIDABLE: Australia’s First Recession in 22 Years
