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Have All The Bazookas Been Launched? Looking Ahead To Post-Easing Era
Corporate Digest | 14 September 2012
By: Gabriel Gan
Articles (41) Profile

The addiction is hard to kick, after years and years of government interventions ranging from corporate rescues during the US financial crisis to receiving aids from supranational bodies in this current European debt crisis. Like an office worker without coffee in the morning, a smoker without regular breaks from nine to five, investors can no longer invest without the hopes of further stimulus measures.

Case in point: When US Federal Reserve Chairman Ben Bernanke failed to announce fresh stimulus measures or the third round of quantitative easing at Jackson Hole, investors did not sell but bought shares instead. Earlier when European Central Bank (ECB) President Mario Draghi failed to cut interest rate as expected, global markets surged when the central bank chief reassured investors that the European Union would surely do something large enough to ensure the survival of the euro.

We must not forget that the global markets were literally going nowhere before the announcements, as investors continue to be obsessed with stimulus measures and moan the lack of it. Now that the central banks have promised more stimulus measures, stock markets are finally moving and defying the traditionally bad months that local investors usually experienced during the Hungry Ghost Festival.

A Year That Breaks Tradition?
For the past many years, we had seen the stock markets drop before and after the Chinese New Year and also during the Hungry Ghost Festival. In 2012, however, we had a very good rally in January as well as February when the Straits Times Index (STI) rallied some 400 points to close above 3,000 points.

Similarly, the “Hungry Ghost Festival jinx” was broken this year as opposed to past years when the stock market in Singapore did not correct heavily. Although the STI did correct shortly after the beginning of the festival, the index stayed rather resilient and started to rally after ECB President Mario Draghi’s announcement of a bond buying programme as well as Fed Chairman Ben Bernanke’s deliverance of the third round of quantitative easing – QE III.

While it is important to look at past trends, I have mentioned time and again that past records can only be used as a guide that should not be the sole approach towards investing. The stock market stayed mightily resilient owing to anticipations of monetary easing and investors are now being rewarded for their patience.

Europe’s “Blank Cheque”
Europe started the rally going when Mario Draghi reassured investors that he would do whatever he could to ensure the survival of the euro but, more importantly, his comments that promised a bazooka-style of easing was the key towards sparking off the rally.

True enough, Mario Draghi delivered what he had promised when he said on 6 September that Europe will embark on a bond-buying programme that is as good as signing off on a blank cheque that will enable the central bank to go on a buying spree – an unlimited buying of government bonds – especially bonds of Italy and Spain although both countries have vehemently denied needing aid. By buying the bonds of both countries, the ECB aims to lower the yields – the borrowing costs – associated with Italian and Spanish bonds so that the interest payment that both countries need to pay will be lower.

Bernanke’s Bazooka
It has been widely anticipated that after the weak jobs report for the past few months, Ben Bernanke would deliver the third round of quantitative easing at the September FOMC meeting which he did.

As a matter of fact, he has been hinting that he would do it sooner rather than later especially when he commented that the Federal Reserve will introduce QE III as long as there is no economic growth as opposed to the past when he said that the Federal Reserve would only ease if the US economy weakens. That sparked off the initial rally followed by the 200-point rally when the Fed announced QE III on 13 September.

This QE III is somehow different from the past two easing exercises in the sense that this third round of easing is jobs-related. Ben Bernanke, who earlier said that unemployment rate of more than 8 percent is unacceptable, will purchase US$40 billion of mortgage debt without a specific deadline or amount. This essentially means that the Fed will continue to buy and buy as long as the labour market becomes strong enough for the Fed to stop.

Is this the final bazooka that we need to jumpstart the US economy? Perhaps.

While some may argue that buying of bonds may not directly improve the jobs market, but such a move will no doubt bolster business and consumer confidence that will eventually feed into the growth engine.

This move, two months before the presidential election, will strongly enhance the chances of President Obama staying in the White House for another term.

China’s Dilemma
With the economy slowing down, surely but still slowly, President Hu and Premier Wen have both warned that China’s economy faces headwinds but will still meet the 7.5 percent growth target set for 2012.

After a few rounds of rate cuts and reserve ratio cuts, there has been no news of further cuts although China did pump-prime the economy by approving new infrastructure projects amounting to US$157 billion. For a while, China has been injecting money into railroad investments as part of its plan to revive the economy. This will be good for companies such as Midas Holdings. Now that China announced the infrastructure projects, could it mean that China will not be cutting rates?

Is China still fearful of the inflation that has stoked sky-high property prices? Is China afraid that the humongous stimulus packages announced by Europe and US will result in hot money flowing into Asia, especially China?

After the rate cuts, China’s property prices have started to climb once again and this will pose a serious problem for the Chinese government after it tried for almost two months to suppress prices. Now with the possibility of more money flowing into China, the government will be more fearful of cutting rates and reserve ratios.

What’s Next?
QE III has come, Europe has virtually ended the crisis with unlimited bond-buying and China has invested in infrastructure. However, these final bazookas do look like the last bit of ammunition in the Arsenal of the Fed and ECB because there is precious little left to do if the economy does not recover.

The stock markets will continue to rally now that investors are intoxicated by the alcohol that is QE III. Beyond QE III, investors will be looking at economic data in China, Europe and US. Pop the champagne by all means, but do not ignore the dangers of the European economy remaining lackluster.

With the US Presidential elections in two months’ time, I seriously do not care if Tom, Dick or Harry becomes the next US President. I am more concerned about whether the President can gain control of the Senate as well as the Congress. If he does, the debt ceiling problem will disappear and future policies will be passed without the bickering that we witnessed during and after the US financial crisis.

Do ride on the rally because we could be in for a jolly good ride. But do not get yourself drunk.


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