The latest round of stimulus is a reminder that nobody really knows what to do anymore. Photo / 123RF
COMMENT:
Anyone would think that the Reserve Bank had announced a global economic downturn last week.
News that its next move on interest rates is likely to be down was met wth a very gloomy reaction.
The Bank didn't have much choice. It was just reacting to something that has been unfolding since December.
It has followed the US Federal Reserve into a worldwide retreat from higher interest rates.
I'm feeling less gloomy about the economy for now - but the central bank retreat is in itself a bit of a downer.
Short term, it will be good news for many of us.
Mortgage rates are likely to stay at historically low levels for longer.
The New Zealand share market rose. Our KiwiSaver balances are likely to look a lot healthier this quarter.
The net effect of this central bank u-turn is a global dose of middle-class welfare.
That's what worries me.
More than a decade on from the Global Financial Crisis we're still hooked on easy money and debt.
In the absence of real productivity gains, wage growth and inflation, low interest rates seem to be the only way to keep consumers spending and, crucially, retirement funds tracking upwards.
Where will the money go now?
Where will those trillions of dollars of retirement funds flow?
We're increasingly looking at a financial world where every sensible investment path appears unappealing.
Bond yields and bank deposit rates are so low that they're almost on par with burying your money in the back garden.
But stock markets look perilously overvalued.
The thought of all the cash, that moved out of markets on expectations of improving deposit rates, suddenly flowing back into shares is mildly terrifying.
Wall Street got the jitters again last week as the US Treasury Yield Curve inverted, signalling the risk of an impending recession.
The US financial media was filled with chorus of commentators claiming that things were different this time because the Fed is playing ball with markets.
I found that response entirely unreassuring.
This week we've seen the NZX-50 power reach new heights. It's up more 10 per cent for the year to date.
Ordinarily that would be the cue for a bit of exuberance in the financial sector – but it doesn't feel like anyone is popping the champagne.
Everyone knows the party is nearly over.
It's 3am, noise control has been around twice and the cops are probably not far away.
Like most of us I'm still hanging around the fringes watching and hoping for that last bit of action.
Nobody likes seeing their savings decline. But we need to pinch ourselves as we hit new heights.
How realistically is this growth tied to company earnings?
Sharemarkets are rising on signals that the economy is slowing. That should be a red flag.
Late last year I called the bull market dead. Technically, I was wrong by about one per cent (it recovered just short of the 20 per cent fall that would have been called a bear market).
But I stand by the sentiment of the call. I used the analogy of Monty Python's Dead Parrot sketch.
I wrote that any revival of this bull market would be akin to Michael Palin's shopkeeper rattling the parrot's cage and saying: "look it moved".
That's exactly what the US Fed has done.
In other words, I think this economic expansion and bull run are being artificially stimulated.
The latest round of stimulus is a sobering reminder that nobody really knows what to do anymore.
We've hit a weird impasse – a kind of Mexican stand-off between the bond markets and equity markets.
Gold prices are rising and that is seldom a good sign.
Numerous chances to make tougher calls and push rates back to normal territory have been headed off by minor market meltdowns.
We saw this in 2016, last February, last December and again this month as the US Treasury Yield Curve inverted.
Cue Wall Street going into a panic and the Fed reacting by injecting some medicine.
The pressure on the Fed to halt its rate-hike plans has been intense.
Not only has it had the weight of powerful banks and investment funds leaning on it, it has had the US President publically telling it what to do.
Politicians will always have a vested interest in lower rates to pump the economy through electoral cycles.
That's precisely why they should not have influence over monetary policy.
In theory, this latest extension for low rates should be a green light for business to borrow and expand - to invest in paths to higher productivity.
That would be one upside of this long period of stability.
Let's bear in mind that the global economy isn't actually that bad yet, growth is still close to three per cent.
But we haven't seen much of that kind of thinking so far and I doubt we'll see much of it now.
Business confidence just isn't there. Worse than that, the confidence in the global financial system just isn't there.
So I'm not feeling gloomy because global growth is slowing. I'll take my KiwiSaver bump and mortgage-rate bargain.
I'm feeling gloomy because every time central banks fall back on this formula to maintain growth they undermine confidence in the system a little further.
Nearly 90% of new mortgage lending in October was floating or fixed for a year or less.