Time for a ‘melt-up': the coming global boom

November 14, 2014

European Central Bank Governor Mario Draghi speaks at a news conference during the World Bank/IMF annual meetings in Washington

Get ready for a “melt-up.”

Back in mid-October, as stock markets around the world plunged faster than at any time since 2011, many investors and economists feared a meltdown. But with the U.S. economy steadily expanding, monetary and fiscal policies becoming more stimulative in other parts of the world and the autumn season for financial crises now over, a melt-up seems far more likely.

There are many fundamental reasons for believing that stock markets may have embarked on a long-term bull market comparable to those in the 1950s and 1960s, or the 1980s and 1990s, and that this process is nearer its beginning than its end. Such arguments have been discussed repeatedly in this column over the past 18 months — ever since the Standard & Poor’s 500, the world’s most important stock-market index, broke out of a 13-year trading range and started scaling new highs in March 2013. Wall Street has been setting records ever since.

These are the four most important arguments for a structural bull market:

First and foremost, the worst financial and economic crisis in living memory has ended, and most parts of the world economy are enjoying decent, if unspectacular, growth. Second, economic and financial policies around the world, though far from perfect, are highly predictable and therefore unlikely to cause further market disruptions. Third, technology is continually advancing and innovation is creating new products, services and processes that stimulate both investment and consumer demand. Finally, inflation is almost nonexistent, at least in the advanced economies, meaning interest rates are guaranteed to stay low for a very long time.

Even in such benign conditions, minor corrections and panics are bound to happen. Financial markets always move in boom-bust cycles, as greed alternates with fear. We saw this in early October, when Wall Street fell by 10 percent in three weeks and equity prices in Europe plunged by almost 20 percent in relation to the U.S. dollar. Such setbacks, however, actually reinforce the uptrend if the fears that triggered them turn out to be illusory — or less daunting than they first appeared. That is exactly what has happened.

There were two obvious catalysts for last month’s stock-market retreat: a sudden drop in oil prices and a run of dismal economic figures from Europe and Japan. The first problem was never likely to prove more than a temporary hiccup because  falling oil prices are, on balance, beneficial to consumption and corporate profits — even if they hurt energy-producing companies and countries.

By contrast, the second problem — slumping economies in Europe and Japan — threatened investors with a genuine nightmare. No matter how well the U.S. economy might perform, global businesses could not shrug off a possible recession in Europe and Japan, especially if the governments or central banks in these countries refused to follow the U.S. model of fiscal and monetary stimulus to revive growth.

Luckily, the policy paralysis in Europe and Japan has now been broken and that, in turn, means that the risk of these vital regions falling back into recession is smaller than a month ago.

The most impressive sign of new policy dynamism came from Japan, with its dramatic Oct. 31 announcement that the Bank of Japan would substantially increase its already enormous monetary expansion, while the $1.2-trillion Government Pension and Investment Fund would more than double its allocation to equities and foreign bonds.

These stimulus measures have been supplemented by reports that Japanese Prime Minister Shinzo Abe might delay a tax increase planned for next October and could even call an early general election to give himself more freedom to pursue additional reforms. Abe seems to have reverted to full-scale stimulus policies after his misguided effort at fiscal tightening in April.

As a result, the favorable economic conditions of 2013 are likely to be restored in Japan next year. Investor pessimism caused by April’s tax hike has vanished — and rightly so. When the facts change, people should change their minds.

An equally surprising, though less decisive, shift toward active policy stimulus is taking place in Europe, revealed by two recent events: last Thursday’s European Central Bank meeting and the previous week’s announcement that the French and Italian governments would run bigger budget deficits than the European Commission had previously demanded under euro zone fiscal rules.

The European Commission, by accepting the two countries’ budget plans and ignoring German demands for tougher austerity, signalled the end of the fiscal tightening that has been a major obstacle to European economic recovery. The European Central Bank’s announcement was even more significant. European Central Bank President Mario Draghi explicitly committed himself for the first time to a 1-trillion euro expansion of the bank’s balance sheet and promised to take whatever measures were necessary to achieve this. This statement effectively meant that the central bank had finally agreed to implement large-scale quantitative easing — albeit employing different techniques from those used in the United States, Japan and Britain.

The fact that Europe and Japan are finally ready to follow the U.S. fiscal road map will not suddenly remove all the obstacles to growth in these economies. But it will make structural reforms easier and more effective. The prospects for a sustainable global expansion are therefore much brighter than expected a month ago.

This improvement in the global economic outlook is more than enough to justify the powerful rebound in stock markets since mid-October.

Even if economic conditions continue improving, equity prices are bound to fall sharply at some point, inflicting painful losses on investors. This is what happened in 1987, roughly five years into the last structural bull market. Boom-bust cycles are inevitable because improving economic conditions encourage speculative excesses, which are then blown away as greed gives way to fear.

But the bust cannot come before the boom — and global economic conditions suggest that a full-scale stock-market boom may be just starting.


PHOTO : European Central Bank Governor Mario Draghi speaks at a news conference during the World Bank/IMF annual meetings in Washington October 11, 2014. REUTERS/Joshua Roberts


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Sigh … No mention of the increasingly costly impacts of climate change coming our way. We do still rely entirely on a physical planet for all material goods. What happens to the global economy in the face of increasingly serious droughts, flooding, heat waves, polar vortexes, etc? Mr. Kaletsky needs to adjust his worldview.

Posted by Sanity-Monger | Report as abusive

So, nothing new then…Boring is good i guess…
Third, technology is continually advancing and innovation is creating new products, services and processes that stimulate both investment and consumer demand.

I believe that some people assume that iPhones, laptops and Netflix etc … are evidence of progress (?) . In some ways, that’s true.

Yet tech advancements also come with some unintended consequences. Our brains being “massively rewired”and that the effect of technology on human intelligence could be “deadly.”

are we becoming stupid consumerism robots/agents ?

Posted by johnnybean | Report as abusive

Good old Anatole, always the optimist. We may be heading for a bull market, but I believe it will not last long for several reasons;
One – Automation is now destroying jobs far faster than it is creating them. Robotics and AI can now easily and economically replace the common worker. Tens of millions of jobs will be eliminated in the next 10-15 years.
Two – The de-Americanization of the world economy is moving along quite well and will likely succeed.
Three – Globalization has not finished quite yet. There are still another billion or so people to exploit for cheap labor, and shipping cost are dropping dramatically and will continue to do so as oil stays cheap and the Chinese and others move their fleets to nuclear power (thorium most likely).
And who said the financial crisis was over anyway? Everyone is still on pins and needles waiting for the western financial system to collapse again as we really didn’t fix anything. In fact, we made it worse. The to big to fail are bigger than ever. They also took away all other investment opportunities so you have no choice but to gamble in their rigged markets.

Posted by tmc | Report as abusive

Anatole Kaletsky I really like you! When I’m on my death bed having been shot in the head, a massive knife in my stomach and a bear trap on each of my appendages- I’m going to give you a call so you can whisper sweet nothings in my ear of how it’s a minor setback and all will be OK. Hooray for unbridled hope!

Posted by mynamehear9 | Report as abusive

Chart of global price-to-GDP ratio makes the stock markets look expensive already don’t you think ? FTSE still appears to be in a bear market. S&P not paying any notice granted…

Posted by heyrevolver9 | Report as abusive

Print your way to prosperity? Hogwash, it’s far more likely this global Ponzi scheme is approaching it’s final death rattle. When it does crash please refrain from the “No one could have ever predicted this BS” A few points; Too much debt, credit and leverage caused the warm-up act known as “Lehman Bros.” Wait till we see what’s coming next… Leverage is higher than ever, central planners interest rate manipulation has pushed mal-investmnet on a scale into trillions of dollars. Look where HY is trading! Asset bubbles and mispriced equities markets are not an “economic recovery”. Japan’s QE Infinity is madness – A currency war with Asia? Ha.. Do you really think China will allow this devaluation? Korea? Taiwan? Around 70% of Japan’s revenues will go towards debt service at 500 year lows on interest rates. When rates rise Japan is insolvent, simple. And we have Italy, Greece, France, Spain & Portugal all basket cases. You can never taper a ponzi scheme and this one’s the mother-load of ponzi scheme’s.

Posted by PlanetPonzi | Report as abusive

Not a single mention of China – the 2nd largest variable and the one with a huge variance. Also the threat of U.S. voters forgetting the Great Recession and electing another George W. Bush (or worse). However, the points the author did raise are all valid pluses for the world economy.

Posted by QuietThinker | Report as abusive

Smells like you are long on your spec portfolio at the moment.

Posted by BidnisMan | Report as abusive

” Third, technology is continually advancing and innovation is creating new products, services and processes that stimulate both investment and consumer demand”

— more like reducing employment, creating excess capacity……

price deflation would stimulate demand……….the average person’s purchasing power has not improved

Posted by Robertla | Report as abusive

Do you really believe that?

Falling oil prices are about to lead to major lay-offs in the U.S. That stock market boom has already happened. We are well on our way to a major recession. Watch, the next 12 months are going to make 2008 look like a holiday.

Posted by Rakavic | Report as abusive

How can economics possibly be this simple? I thought that the original QE was justified. Beyond that I’ve become a skeptic. Just keep creating liquidity and everything will be OK? That’s it? That’s the Holy Grail? Perhaps, but if true we’ve been wasting a lot of time and effort studying economics. All we need do is keep creating liquidity, keep printing.

The author mentions the October 1987 one day crash. After that eventful 22% down day the market recovered in large part due to corporations buying back shares that were thought to be undervalued. Thanks to central bank stimulus, today we have corporate interests borrowing cheaply in order to finance share buybacks at very high (record?) valuations. There is a big difference.

Posted by Missinginaction | Report as abusive

Why does greed give way to fear? Or the other way around? Why don’t people stay in a perpetual state of greed or a perpetual state of fear?

Posted by Sewblon | Report as abusive

This article is an absolute joke.

Posted by varker007 | Report as abusive

With a weak economy. high unemployment and low interest rates, an austerity budget is the wrong approach, counterproductive, dangerous.

Posted by Leftcoastrocky | Report as abusive

“”Luckily, the policy paralysis in Europe and Japan has now been broken and that, in turn, means that the risk of these vital regions falling back into recession is smaller than a month ago.””

Not since the claim that the Titanic was unsinkable has there been a more inopportune statement.

Posted by ekaneti | Report as abusive

Perhaps more for the wealthy. The middleclass in the US is disappearing. Trickle down doesn’t work except if your the 2%, because it’s really a suck up system. That is, the wealthy suck up all the benefits of peoples labor.

Posted by brotherkenny4 | Report as abusive

Anatole forgot one key fact about structural bull markets:they never begin with near-record S &P p/e’s. Multiples were dirt cheap as the 50’s and 60’s bull began, and were very low at the onset of the 80’s structural bull.By the time they reached today’s p/e levels in the mid 60’s and late 90’s, markets were facing the prospect of a decade and a half of no growth(1966-1982, 1999-2013). I think we can look forward to another structural bull market, but not before one of two things happens to re-normalize multiples:either we enter a mild bear market in 2015, or markets experience sub-par growth over the next 5 years.

Posted by joshsoffer | Report as abusive

It is extremely unlikely that the “melt-up” described in this article will occur in the near future. First of all, the authors’ arguments for a structural bull market are highly debatable. The statement, “Most parts of the world economy are enjoying decent, if unspectacular, growth”, doesn’t concur with the latest data from major economies such as the European countries and Japan. Smaller economies with decent growth rates can account little for the health of global economy. In November, the manufacturing PMI is 50 in Germany and 48.4 in France. And Japan is confirmed to be in recession since Q2 2014. The argument that economic and financial policies are becoming more predictable is also easily refuted by the People’s Bank of China’s recent rate cut, which caught the world by surprise. It was also against the general speculation that the Bank of Japan earlier announced an expansion of its asset purchasing program, a “dramatic” move according to the author himself. Both actions were aimed to strengthen two economies that may be actually weaker than they seem. Another argument for a bull market is the low, “almost nonexistent” inflation rate, which by itself is a worrying sign of weak economic growth. The inflation rate is constantly below the inflation target in the United States and Japan, while deflation is threatening all of Europe. The pretty picture painted by the author doesn’t even remotely resemble the painful reality. The markets are recovering from previous shocks, but this upward trend is not strong enough to become an actual boom.

Fundamental weaknesses in the economies need to be addressed before we can confidently expect high growth rate and prosperous markets. In the article we saw one of those weaknesses in action with European Commission allowing Italy and France to run bigger budget deficits, against Germany’s preference for austerity. The economies are now plagued with excessive debts. Even the governments are operating with incredible amounts of debt. The public debt to GDP ratio is 92.2% in France and 132.6% in Italy, both significantly higher than Germany’s 76.9%. Germany has always been cautious and circumspect with certain economic policies, such as large scale asset purchasing programs and expansion of government debt. And this attitude could be well justified by the fact that Germany is still the leading economy in the Euro zone. If the German government can operate efficiently with less debt then why can’t the Italian and the French do just the same? In addition to the public debt, there is debt trouble in the private sector too. It can be best observed in China where the economy-wide debt to GDP ratio is now at 251%, which is 100 percentage points above its 2008 level. After the financial crisis PBOC issued trillions of Chinese Yuan to stimulate the economy. The easy money, along with the lack of regulations, allowed businesses the capability to borrow more than they should. Consequently, over leverage and bad debts become norms. The ratio of 251% is not so staggering when compared to the US’ 260%, the UK’s 277% or Japan’s 415%. The root cause to the heavily leveraged economy is that people prefer immediate, short-term growth instead of modest yet sustainable growth. And raising excessive debt is the best way to rush immediate growth. The financial crisis exposed not only the wrongdoings in the financial sector, but also the weaknesses in the economy. For now we must settle for the weak growth rate and try to reform the economy to ensure sustainable growth, and reach for high growth rate only when we are truly ready. Cleaning up over leverage and encouraging new businesses can be a good start.

Posted by EJiang | Report as abusive