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What will be the endgame?

What really ails the stock market? As I write this, the STI is -14 and set to record its 11th loss in 12 sessions. Unless there is a massive turnaround in the months to come, the STI looks set for another poor 12 months - this after it lost 14.3 per cent last year. Monday's session might have seen the index rise 32 points after ten straight losses but that was very likely short-covering more than anything else, so once that's been completed, renewed weakness was perhaps only to be expected. Look around the world and the story is similar - Hong Kong is currently -8.5% for the year, whilst the Nikkei is -14%. Europe isn't far behind - the Euro Stoxx is -9.5%. But why is sentiment so weak? 

This is a question posed and pondered numerous times before by myself and many others who are more qualified than I. The replies usually are that there are worries that US interest rates are on the rise, that China is facing a hard landing and that volatile oil prices are simply causing too much uncertainty. I think these factors may be playing some part - though I still can't figure out why low oil prices are bad -  but I think the root causes go much deeper and stretch back many years, the rot setting in a long time ago when a) US banks were deemed "too big to fail'' b) monetary policy was pushed way beyond its limits to accomodate those banks, and c) interest rates were artificially depressed for way too long thus creating an over-reliance on credit for corporate and economic expansion.

You can fool markets for a while by relentless money injections (or money printing if you like) and leverage but eventually, if you don't change your game, there is a price to be paid. With apologies to the US central banker who once likened money printing to boozing at a party, the punch bowl can be filled over and over again but eventually even the most hard-core drunk will have to say enough is enough. A cruder example but no less relevant is that you can zap a dead body with electricity to get it moving like Frankenstein did, but once the juice expires, you'll be left with nothing more than a dead body that has no mobility without outside help. And if the law of diminishing returns was to apply, each zapping will have less and less of an effect. This I believe, is already happening; what's more, markets know that the zapping is progressively losing power and that in all likelihood aren't having any positive effect and so money is quietly being shifted away to less risky investments. Incredibly, the latter includes the Japanese yen, which is at its highest in more than a year against the USD despite the country operating a negative interest rate regime. 

This of course begs the question - if monetary authorities have run out of effective tools and if markets know this, what will the endgame be? I don't know to be honest. Maybe markets will continue staggering indefinitely as they have for the past few years, rising when money is printed and pumped in, then falling until the next printing/pumping exercise. Maybe that's the best that we can hope for since the alternatives are too painful to contemplate.

 

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The Singapore stock market observed.