What makes the stock market a casino, as John Maynard Keynes called it, is that is bears only a remote relationship to movements of the real economy.
The stock market has been soaring; yet the news from the real economy continues to be bearish. Europe looks to have a second quarter of recession, as the purchasing managers indices for France and Germany are still in contraction, France’s markedly so. China’s index also moved into contraction territory in the latest reading. Japan has had a boom quarter (GDP up 3.5% at an annual rate), driven by Abenomics’ huge infusions of cash causing a fall in the yen and a large run-up in the Japanese markets. And yet — Japanese interest rates spiked to 1%; if that holds the wealth of Japanese bond-holders who are sitting on vast quantities of long-term bonds at 0.5% or less will be undercut.
Today the market seems to be taking a slight dip — but animal spirits being what they are, no one wants to think negative. One pundit is predicting an S&P of 1750 before year’s end. Who knows?
What is certain is that there is no impetus for real growth in the global economy. India continues to get bogged down in infrastructure and education failings; Russia’s growth is down to 1% in recent quarters; Brazil remains a difficult place to do business and its Mercosur trading block is turning inwards. Add these problems to the slowdowns in Europe and China and it is hard to see where the world economy will gain traction.
But the dynamics of financial speculation are such that the money pouring out of the Fed will continue to look for yield, and hence will go into stocks, inflating the bubble, until there is some undeniable reason for confidence to fade. At that point, and only then, will we see the bubble pop.