Major Economies Are Heading South... But Stocks Are Still Rising

I've written a blog back on 17 June 2012 saying that I believe stock markets worldwide are in the process of stabilising. Below is a hyperlink to the blog entry.

http://musingsonwallstreet.blogspot.sg/2012/06/stock-markets-worldwide-are-stabilising.html

My stand then was that the major economies are likely to deteriorate further, but technically, stocks are showing signs of moving up simply due to the massive liquidity. ECB policy makers reduced the main refinancing rate on July 5 to a record low of 0.75 percent and cut the deposit rate to zero to stimulate credit supply and lending. As a result, all risk assets shot through the roof as cheap money looked for yields. Depositors are forced to buy properties to preserve their wealth, happy with the measly 3% gross rental yields. Some ventured into dividend paying stocks as for the first time since 2008, dividend yields of stocks in Singapore, the US are well above their respective 10 year government bond yields.


Since 17 June 2012, not every stock market has risen though... The MSCI World has reached May 2011's high. Since 17 June, it has risen by 3.7% (see chart 1)

Chart 1: MSCI World

The US real estate sector is doing extremely well. DRN, or Direxion 3x US Real Estate ETF has also regained the high that it reached in March 2012, but not the highs reached in July 2011. Nevertheless, it rose by 12.2% since 17 June 2012. DRN's rise was a reflection of US' recovering real estate market (Chart 2).

Chart 2: Direxion Daily Real Estate Bull 3x Shares ETF

Due to the heat wave, crop yields have fallen. Monsanto has risen by 4.7% since 17 June 2012.

Chart 3: Monsanto

However, if you think this is a start of a prolonged bull run. Think again. The real economy has turned south again. The wobbly rebound of the OECD Composite Leading Indicators of the two fastest and potentially the largest economies in the world; China and India, has alarmingly contracted! The Euro area has also contracted. Only the US is holding up.

The scary thing is that the Eurozone and the US have almost run out of monetary options. Their fiscal ammunition is also limited given their crippling debt levels. Given the poor economic outlook, I believe that even if there is a rally of stocks, even if there is another Quantitative Easing, will be weak. Quantitative Easing does not boost demand. It merely flushes the world with liquidity, which in turn drives up asset prices. Only rich asset owners benefit and salaried workers suffer. At the end of the day, it pushes up inflation as housing costs escalate beyond the reaches of the first time buyers.