US and European monetary policy upsets the markets

US and European monetary policy upsets the markets

Bad news on the US economy resulted in equity markets closing on a high for the S&P and the Dow Jones indexes on Monday, May 18. But looking at market fundamentals, this is a paradox, writes Prince Michael of Liechtenstein.

Economic bad news is likely to dissuade America’s central bank, the Fed, from tighter monetary policy. Cheap money will continue to be around and is likely to find its way into the stock market.

This is the expectation driving the market and the danger of a bubble increases. However, a bull run cannot be ruled out for the time-being because of the abundant money supply.

It is interesting that billionaire investor Carl Icahn - who invests heavily in Apple - made a statement that Apple is undervalued on the market.

Apple has abundant cash and Mr Icahn suggested a stock repurchase programme which would give cash back to investors. Such suggestions drive the market up again.

Giving surplus cash back to shareholders, in addition to the normal dividend, is legitimate and drives share prices. But if this is applied broadly, it shows there is more cash around than needed for investments and operations.

European markets also appear to be highly valued due to the European Central Bank’s low-to-negative interest policy, which leaves bond markets with little reward.

Unfortunately a bubble is normally only recognised when it bursts. In the meantime, the net value for investors increases on paper and will only really increase when they sell at high points before there is a painful correction.

Wise words suggest that financial markets pre-empt the economy. This wisdom can only be applied on functioning markets, not those driven by misguided monetary policy. Such ‘neo-Keynsian’ monetary policy is applied on the basis that monetary measures resulting in an abundant monetary supply can drive the economy for a sustained period.

At the moment, it appears that this ‘neo-Keynsian’ monetary policy is also driving inequality, as the money produced remains in the financial markets and does not find its way into the economy.

But a bubble can burst very quickly, and - as we know from the past - it is impossible to forecast its arrival.

It is not ‘speculators’ who are upsetting the markets, it is monetary policy. We can only hope that the blame will not be put on market failure in the future.

Related reports:

Unrealistic expectations of growth lead to wrong decisions

China slowdown could be good news for Western economies

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